The Economist, 1 December 2005
Every business worries about increasing costs and deteriorating assets. In banking, that means rising interest rates and weakening loan quality and, beyond that, signs of sickness in the economy as a whole. In January the share prices of America's banks began to slide because of a combination of worries, even though the banks' operating performances continued unabated. Over the past month or so, however, prices have come bouncing back.
At the start of the year, the Federal Reserve was already tightening interest rates; the departure of Alan Greenspan from the Fed chairmanship was on the horizon; and energy prices were rising. Plenty of bad news followed, such as the travails of General Motors and the ravages of Hurricane Katrina, as well as good news that could be interpreted as bad, such as low unemployment, which can help push wages up. Banks therefore faced the prospect of greater loan losses, lower demand for credit and a higher cost of funds. Mergers in the industry slowed to $7 billion in the first quarter, against $82 billion in the same period of 2004, according to Eric Reinford of SNL Financial, a Virginia research firm. Few wanted to pay for a business that seemed to be going nowhere.
There are still reasons to worry: a slowdown in the housing market, which has long buoyed the economy and the banks, looks overdue. Nevertheless, since mid-October, the start of the third-quarter earnings season, sentiment has changed. Overall, profits are up by 20-25%, says SNL. A share-price index it compiles, covering 470 listed banks, has risen by 12% in just over a month, against 7% for the market overall.
The banks are benefiting from rising demand for commercial and industrial loans and from the lowest loan-loss rates on record. Energy prices have been easing lately and with them concerns about inflation, even though in the third quarter the economy grew at its fastest since the first quarter of last year. Expectations about where the fed funds rate might stop have faded from 6% earlier in the year to maybe 4.5%, just half a percentage point above the current level. The coming change at the top of the Fed has caused no tremors so far.
Rumours are once again rife about potential mergers, particularly among large banks (but not the largest few). These include AmSouth, Fifth Third, PNC, National City, Mellon, SunTrust, and anything with a teller window in Puerto Rico.
Perhaps the most intriguing sign of optimism is the eagerness with which bank bosses seem to be buying their own companies' shares. According to Thomson Financial, a research firm, for four weeks running more than half of the largest insider transactions have been by finance company executives, the longest stretch of this sort all year. This, Thomson observes, has frequently been followed by good news from the financial industry within six to nine months. The managers, like the market, seem to expect just that.
Every business worries about increasing costs and deteriorating assets. In banking, that means rising interest rates and weakening loan quality and, beyond that, signs of sickness in the economy as a whole. In January the share prices of America's banks began to slide because of a combination of worries, even though the banks' operating performances continued unabated. Over the past month or so, however, prices have come bouncing back.
At the start of the year, the Federal Reserve was already tightening interest rates; the departure of Alan Greenspan from the Fed chairmanship was on the horizon; and energy prices were rising. Plenty of bad news followed, such as the travails of General Motors and the ravages of Hurricane Katrina, as well as good news that could be interpreted as bad, such as low unemployment, which can help push wages up. Banks therefore faced the prospect of greater loan losses, lower demand for credit and a higher cost of funds. Mergers in the industry slowed to $7 billion in the first quarter, against $82 billion in the same period of 2004, according to Eric Reinford of SNL Financial, a Virginia research firm. Few wanted to pay for a business that seemed to be going nowhere.
There are still reasons to worry: a slowdown in the housing market, which has long buoyed the economy and the banks, looks overdue. Nevertheless, since mid-October, the start of the third-quarter earnings season, sentiment has changed. Overall, profits are up by 20-25%, says SNL. A share-price index it compiles, covering 470 listed banks, has risen by 12% in just over a month, against 7% for the market overall.
The banks are benefiting from rising demand for commercial and industrial loans and from the lowest loan-loss rates on record. Energy prices have been easing lately and with them concerns about inflation, even though in the third quarter the economy grew at its fastest since the first quarter of last year. Expectations about where the fed funds rate might stop have faded from 6% earlier in the year to maybe 4.5%, just half a percentage point above the current level. The coming change at the top of the Fed has caused no tremors so far.
Rumours are once again rife about potential mergers, particularly among large banks (but not the largest few). These include AmSouth, Fifth Third, PNC, National City, Mellon, SunTrust, and anything with a teller window in Puerto Rico.
Perhaps the most intriguing sign of optimism is the eagerness with which bank bosses seem to be buying their own companies' shares. According to Thomson Financial, a research firm, for four weeks running more than half of the largest insider transactions have been by finance company executives, the longest stretch of this sort all year. This, Thomson observes, has frequently been followed by good news from the financial industry within six to nine months. The managers, like the market, seem to expect just that.
