NEW YORK - Strong U.S. Financial are beginning to separate from the weaker financial institutions which have rallied with the stock market since it hit its lows in March 2009.
The strongest institutions, PNC Financial, U.S. Bancorp and Wells Fargo stocks continue to move higher as other banks decline. The banks which are severely weakening are Marshall & Ilsley and Regions Financial which are down nearly 30% in the last month. Investors have rapidly switched into the banks with the strongest amounts of capital such as U.S. Bancorp, PNC, BAC, JP Morgan & Chase and Wells Fargo and switched out of the more speculative names. Stocks such as Bank of America and Citigroup which are profitable and well capitalized have not seen as much of rise in their stock price due to extra bailout packages they took from the government which can limit their ability to increase their dividends.
Stocks such as PNC Financial which has the second highest tier 1 common ratio in the businesses only behind Comerica Bank and is eagerly awaiting to redistribute capital to its shareholders.
But there is more... The stocks of the companies which have to pay back TARP are caught in perpetual loop. As their share prices go down the potential for dilution to pay back tarp increases which intuitively would cause its share price to go down further. For instance RF owes the government $3.4 billion at $7 a share the stock would only be diluted by 25% to pay back $3.4 billion but at $5 a share it would be diluted by nearly 40%. If the stock drops to $1 it would be diluted by 75%. This may not prove to be a problem if the shares increase in the future and RF pays the government back with more expensive shares. However, the government may not be forgiving to the bank and may force them to raise the capital at a inopportune time. This is what makes the stock unattractive regardless of the underlying fundamentals which are not very good either.
We continue to recommend, PNC Financial to see the full report click here.
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