Bank stock prices could recover before credit virus is cured

Jennifer Schonberger | Mar 31, 2008 2:00pm EDT | Comment

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Markets can’t seem to shake the credit crisis fever, but small-cap banking stock prices might not suffer as long as the underlying economy, according to B. Riley banking analyst Andy Stapp.

The last credit crisis began in 1989 and didn’t stabilize until 1993, according to Stapp, but banks’ stock prices led the market higher well before the underlying crisis was resolved.

“I think we still have some time to go, but the good news is that in the last credit crisis, bank stock prices began to rebound in the fourth quarter of 1990, before asset quality normalized,” said Stapp. “I think bank stocks will lead well before the asset-quality issues are resolved.”

Stapp is expecting charge offs to peak in the third or fourth quarter pending any worsening in the economy.

“If the housing market weakens further, the third or fourth quarter could get higher net charge-offs,” said Stapp. “But hopefully the Fed rate cuts, which typically take six months to take effect, will kick in and by that time the economy will bottom out.”

Even if the economy does slip into deep recession, Stapp says that small cap banks’ net charge-offs could still peak in the third or fourth quarters, as their liquidity and balance sheets remain robust due to the housing boom and a recent scaling back of operations on account of the weakening housing market.

Still, with the Fed rate cuts the yield curve is steeper and friendlier to banks as credit spreads have expanded and enabled banks to once again profit off the popular carry trade.