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Bank Stock Euphoria?

Stifel Nicolaus SF analyst Christopher Mutascio warns that bank stocks may be getting ahead of themselves. The analyst of regional banks said Feb. 4 that the banking industry has seen a “nine-day meteoric rally [that is] bordering on euphoric and is occurring at a time when fundamental deterioration is accelerating, not stabilizing or even showing signs of slowing.”

The big move in bank stocks is largely the result of the Federal Reserve’s recent deep cuts in interest rates. Before the cuts, banks seemed to hit bottom and since then they’ve rocketed 25% higher, according to Mutascio’s calculations.

Bank investors argue interest rates can help bank profit margins. That’s true, he says, but what about bank customers ability to repay their bank loans? He warns that credit quality just starting to deteriorate and could get a lot worse. “This faith-based Fed rally seems overdone,” Mutascio wrote.

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