Analysts at UBS, Switzerland’s largest bank, have turned negative on U.S. regional banks.
The reason: a sluggish recovery in the credit sector, commercial and residential real estate and a sluggish drawdown in the banks’ reserves, UBS analysts say.
They recommend that investors sell a large number of regionals, including KeyCorp, Huntington Bancshares, Regions Financial and TCF Financial.
"We continue to believe the pace of earnings recovery will fall well short of expectations,” the analysts told CNBC.
“We think the recent rally and ensuing valuations are unsustainable, and the group is poised for a meaningful pullback."
CNBC’s Bob Pisani says what is most important for banks this quarter is credit. “We need to see the rate of loan charge offs and delinquencies leveling off and begin decreasing,” he wrote on CNBC.com.
“Provisions for future losses need to start declining. Unfortunately, it is likely that charge offs for things like credit cards will remain high this quarter, as will mortgage writedowns.”
Still, he sees a bright spot: bond trading revenues.
“It was a great quarter, with oceans of money continuing in areas like high yield.”
While UBS is bearish on regional banks, MIT economist Simon Johnson is concerned about the country’s biggest banks.
"The process of saving them has allowed them to build themselves up so that their balance sheets are now bigger than they were before the crisis. The too big to fail problem has become worse," he told Reuters.
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