The bank-market tide has gone out. Will all banks rise the same when the tide comes back?
Since mid-2007 the shares of companies in the banking sector have progressed from drifting lower, to establishing a declining trend, to absolute free-fall. Over the past 12 months the Dow Jones Regional Bank Index ETF has plummeted 52%. A much-used phrase to profile such a broad-based decline is “When the tide goes out, all the boats in the harbor are lowered.”
The contra-inference is that, when the tide comes back in, all the boats will be lifted.
Many times, in past market cycles, this has proven to be true. I believe that this time will be different. Yes there will be a measurable trend reversal when a change of pricing dynamics manifests in the markets. I do believe average pricing levels will rise.
However, I do not think that it is prudent for any “community bank” investor to assume that the shares of the banks they own will automatically participate in this future up-swell of activity. Already the investment community—and the media for that matter—has not shown that they can differentiate between Wall Street and Main Street.
The media coverage of the banking problems have focused on the issues facing Bank of America, Citi Group, Wells Fargo and other behemoths that each have hundreds of billions of dollars in assets, failing to illustrate how smaller community banks in some cases stand to benefit from the demise of their larger competitors.
In fact, there are more than 7,500 banking institutions in the United States of which 98% have a total asset base of $10 billion or less. Furthermore, about 92% have assets of no more than $2 billion, and a vast majority of these have maintained solid business and lending practices. While all banking institutions are facing the challenges of the current recession, the specific problems salient in a large bank are different from those of a community bank.
For the full report, click for notallbanksarethesamejamesmiller32509
About the author: James Miller is director, corporate finance, for C.K. Cooper & Co., based in Irvine, California. His experience in the securities and investment management industries spans more than 30 years, including as president and CEO of a full-service broker/dealer that was a subsidiary of a bank and the director of research for a New York stock exchange member firm.
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