Many stock market participants have sung the praises of bank shares in recent months, pointing to rising profits and undervaluation.
But a look at banks’ fundamentals isn’t encouraging, The Wall Street Journal reports.
Interest rates near record lows continue to vex the institutions, for example. With rates so close to zero, banks can’t cut deposit rates much further. At the same time, banks are replacing maturing long-term loans with ones charging much lower rates.
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The situation is unlikely to change anytime soon, as the Federal Reserve plans to maintain its low-rate policy at least until late 2014.
Banks’ net interest margins — the difference between what it costs for them to borrow money and what they can earn from lending it — are suffering as a result.
Meanwhile, bank lending volume remains stagnant. Total bank loans and leases gained only 1.4 percent in the second quarter from the prior three months.
“The lack of wind in banks' sails doesn't mean they can't continue to churn out profits or that they are about to sink,” The Journal states. “But it helps explain why valuations are downbeat and may remain so for some time.”
But many experts have turned bullish on banks amid the stocks’ strong performance so far this year.
“As we look out to the next three to five years, it's inappropriate to have any kind of underweight bet on the group," Keith Wirtz, chief investment officer at Fifth Third Asset Management, tells Reuters.
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