Since bank stocks seem to be the stock picks that dominate the early part of the earnings season calendar, investors have had a lot to chew on in the financial sector lately. The newswires have been abuzz about bond trading losses for the likes of Goldman Sachs (NYSE: GS) and Citigroup (NYSE: C) while earnings have been juiced by the releases of loan loss reserves by JP Morgan (NYSE: JPM) and Wells Fargo (NYSE: WFC).
The overall impression: While Wall Street struggles as the bond boom slows and strict new regulatory burdens bite the bottom line, Main Street lenders are enjoying a rebound thanks to the resurrection of consumers, a stabilizing housing market, and accelerating economic growth.
Don’t get me wrong: Financial stocks in general have been doing very well. But on balance, smaller regional lenders seem to be running ahead of the pack as they finally enjoy the earnings rebound their larger brethren saw last year as financial markets moved off of their bear market lows.
Investors, it seems, are already discounting this reality. Since November, the KBW Regional Banking ETF (NYSE: KRE) is up nearly 22%. The KRE holds community lenders like East West Bancorp (NASDAQ: EWBC), Community Bank System (NYSE: CBU), and Cathay General Bancorp (NASDAQ: CATY). Compare this to the 13.7% rise in the KBW Capital Markets ETF (NYSE: KCE), which includes Wall Street titans like Goldman Sachs, and Morgan Stanley (NYSE: MS).
Whereas the 2009-2010 period was dominated by investment banks trading for clients and their own accounts, 2011 will be all about commercial and regional banks enjoying a rebound in lending and a reduction in loan losses. And that will be great news for my top stock for 2011, regional lender Zions Bancorp (NASDAQ: ZION), which reports earnings after the bell today.
The next few months will be key for Zion as it fights to return to the levels of profitability it enjoyed before the Great Recession struck and the housing bubble that fueled its loan activity in hard hit states like Arizona, Nevada, and California burst. Analysts expect the company to report a loss of 36 cents per share. This is expected to improve to a loss of 15 cents per share in Q111 before moving back into the black in the second quarter with a profit of a penny a share in Q2. Right now, analysts expect the bank to earn 34 cents per share for the year.
There is still plenty of skepticism out there. Analysts at Jefferies recently downgraded the stock on concerns the economic recovery is progressing fast enough to provide a lift to Zion’s bottom line. I disagree, and given the bank’s heavy exposure to commercial real estate, the recent rebound in retail sales should translate into better operating results.
I’ll review Zion’s results after they’re released — so stay tuned.
Disclosure: Anthony does not own or control a position in any of the companies or funds mentioned.
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