Analysis: Pain may not be over for U.S. banks

Mon Dec 12, 2011 2:02pm EST
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By Angela Moon and Ryan Vlastelica

NEW YORK (Reuters) - Even experienced Wall Street contrarians are eyeing the beaten-down U.S. financial sector warily.

The sector is down 20 percent this year, by far the worst performer in the S&P 500. The weakness has been so pervasive that the S&P, which is down 1.8 percent in 2011, would be up 3.3 percent on the year if financials were excluded, according to Standard & Poor's Equity Research.

Most market participants agree these stocks are set for a rebound over the long term. They still appear too risky for short-term traders.

Arguably, this is when intrepid bargain hunters who buy into investor fear would be snapping up the beaten-down sector. But the problems dogging banks all year - from the debt crisis in Europe to the bleak outlook for profits - do not appear to be abating.

"Our job is to buy low and sell high. With financials, I'm still questioning, 'What is low?'" said John Manley, chief equity strategist for Wells Fargo Advantage Funds in New York.

The aversion to financials is great. Assets in bank-focused funds have dropped by 40 percent in the last six months, and the group is the only one of 10 S&P sectors trading at less than the value of the assets on their books.

Market participants cite various reasons for financials to decline further, including regulations, weakness in the housing sector and fears linked to Europe's escalating debt crisis.

"Valuations are attractive, but there has to be a catalyst to move prices higher and I just don't see that," said Peter Coleman, director of research at JMP Securities in San Francisco.   Continued...