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WSJ: Bank Stocks May be Undervalued

By    |   Thursday, 13 Oct 2011 07:58 AM

Many investors and analysts have written off big U.S. banks.

Europe’s debt crisis, slowing global economic growth, the restrictions of the Dodd-Frank law, and the raft of bad assets they still hold will do the banks in, many experts say.

And bank stocks have plunged recently, with the KBW Bank Sector index down 27 percent so far this year.

But hold on a minute, David Reilly writes in The Wall Street Journal’s Heard on the Street column. Unless the financial system really collapses, large bank stocks offer attractive values, he says.

“Clearly, the steep discounts to tangible book value seen in recent weeks should narrow,” Reilly maintains. For example, Morgan Stanley recently traded at about 60 percent of book value. For Goldman Sachs, the level is 80 percent, and for Citigroup 50 percent.

“Those are going-out-of business valuations,” Reilly says. “If the global financial system isn't headed for meltdown, they aren't warranted.”

To be sure, a worsening of Europe’s morass could nip any bank stock rally in the bud. “But for investors ready to bet on a European solution, there is a lot still to play for,” Reilly writes.

As for bank pessimists, their views were reinforced by the initial version of the Volcker rule against banks’ proprietary trading.

“It’s going to increase costs, decrease revenue and profits, and potentially scare off your most productive employees, Donald Lamson, a former Treasury Department official who helped write the rule, tells The New York Times

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Many investors and analysts have written off big U.S. banks. Europe s debt crisis, slowing global economic growth, the restrictions of the Dodd-Frank law, and the raft of bad assets they still hold will do the banks in, many experts say. And bank stocks have plunged...
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2011-58-13
Thursday, 13 Oct 2011 07:58 AM
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