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Stocks Bounce, Banks Fade By Charles Payne

What's the deal with banks? Are they bracing for Armageddon or are they still mired in some kind of limbo, bracing for an inferno, perhaps? I get that nobody is getting loans. I realize the pendulum has swung so far it's harder for people and businesses to qualify for loans, and there is that Dodd-Frank anvil hanging by a thread over the entire industry. But, still, something isn't right. In the first quarter lending to small businesses, according to the Small Business Administration, declined 2.4%. The first quarter drop came on top of a 1.0% fourth quarter decline.

Banks held $609.4 billion in small business loans ($1.0 million or less) at the end of March, down from $624.3 at the end of 2010. Micro loans (under $100,000) slumped by 2.9%, while those from $100,000 to $1,000,000 decreased 2.2%.

Overall loan balances in the most recent reading declined $126.0 billion, but most alarming from the FDIC was that there are $7.28 trillion in total loans but $9.22 trillion in deposits at commercial banks. The loan-to-deposit ratio is 79%, the kind of reading that suggests banks are bracing for a world of hurt. Maybe they're scared to death of the Administration, even though there is no doubt they would be bailed out again.

In the meantime, so-called "problem banks" are beginning to level off, coming in at 888, down from 884 or 11.7% of the banks insured by the FDIC. Underscoring the fact that big banks have only gotten bigger, the total amount of assets at risk from problem banks is only 3.2% of total assets at commercial banks.

Yesterday, Citigroup (NYSE:C) lowered its quarterly earnings estimates on fellow banks:

* Morgan Stanley (NYSE:MS): $0.43 per share from $0.59 per share
* Goldman Sachs (NYSE:GS): $2.00 per share from $3.75 per share
* JP Morgan (NYSE:JPM): $1.36 per share from $1.39 per share

Perhaps investors have already begun to look past the current quarter for help from GDP or other companies, but it's hard to say things get demonstrably better. For all of the talk that Greece could be the next Lehman, if there is something lurking in the shadows, I would think a bank would be the next Lehman. I'm not saying we are there at this moment but there is so much that seems to have faded from the public consciousness with respect to banks.

For now, it's hard to understand why a bank would take the small crumbs from Treasuries even while it waits out the rest of the regulatory boom. Sure, banks should keep a larger nest egg, but they have all their eggs in one basket...their vault. Banks should be in the business and allowed to make loans at the end of the day.

The market is so oversold that there could be a decent bounce without the participation of banks, but banks could be an anchor on a longer term rally effort. And, maybe, that's the best-case scenario; there could be something sinister about the excessive amount of deposits not being converted into loans or banks could know something we don't know. It remains to be seen but there is no doubt dark shadows from regulatory reform to a shaky recovery have sent the industry scrambling for cover.

Today's Session

Markets are edging higher and that's great news, but any early rally is tenuous at best. If German officials can shut up before that no-confidence vote in Greece (after the closing bell) the rally should hold, maybe gain momentum.