By: Billy Fisher. Contributor, Stock Traders Daily
The Congressional Oversight Panel released its monthly oversight report yesterday and the findings are not all that optimistic for regional banks. The report specifically noted that, “Community banks, unlike the largest Wall Street banks, face the greatest risk of insolvency due to mounting commercial real estate loan losses.”
The findings may not come as a complete shock, but they do serve as a reminder that despite a recovery in the stock prices of these banks, stormy weather may still lie ahead.
Although ETFs such as the SPDR KBW Regional Banking ETF (NYSE: KRE) and the iShares Dow Jones U.S. Regional Banks Fund (NYSE: IAT) suffered significant losses in 2007, 2008 and 2009, they have mounted major rallies from their low points experienced in March of last year.
These ETFs have actually been among the top performing non-inverse ETFs in 2010. They have risen 4.9% and 5.0%, respectively, year-to-date. At the present, approximately 80% of all ETFs tracked by Morningstar are in the red so far this year. Traders looking to take a long or short position in either of these ETFs are advised to check out our free KRE and free IAT trading reports before pulling the trigger.
Looking at individual banks, there has certainly been a number of success stories and stories of regional banks taking small steps back in the right direction. For instance, Prosperity Bancshares (Nasdaq: PRSP), a regional bank in the southwest, recently reported a strong Q4 in which its Tier-1 capital ratio rose to 12.6% from 10.3% in the year-ago quarter. Net interest income surged and the bank handily topped analysts’ estimates on the earnings front.
PRSP shares trounced the market in 2009 returning 38.7%, were the recent recipient of an analyst upgrade and have held their ground so far in 2010. Traders looking to bet on this stock can review our free PRSP trading report for additional analysis.
Another Storm Brewing
The story at Prosperity may not be the norm going forward however. Elizabeth Warren, a law professor at Harvard University who heads the TARP oversight panel, told The Wall Street Journal, "The banks that are on the front lines of small-business lending are about to get hit by a tidal wave of commercial-loan failures."
Regional banks such as Regions Financial (NYSE: RF) that have acknowledged significant exposure to commercial real estate are readying themselves for any potential adversity that may arise in the coming quarters. Regions is a good example of a company that has been proactive in continuing to build its reserve for non-performing loans even though its commercial real estate exposure may have already seen its worst times. Traders looking to invest in Regions can benefit from our free RF trading report prior to diving in.
The Congressional Oversight Panel’s report notes that nearly 3,000 small financial institutions in the U.S. have exposure to commercial real estate that could jeopardize their overall financial health if these loans go sour. The government’s oversight of regional banks will likely become the subject of a brighter spotlight now that it has become official that the U.S. taxpayers’ $2.3 billion TARP stake in CIT Group (NYSE: CIT) has been officially wiped out. Traders looking to bet on the future of CIT can utilize our free CIT trading report to assist in implementing proper risk controls.
The Congressional Oversight Panel’s report underscores the risk of investing in the regional banking sector. It also opens up the door of opportunity for traders to sort the good banks from the bad.
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Disclosure: No positions in kre, iat, prsp, rf, or cit