No Panic for Most Financials

Posted by: Ben Steverman on June 11, 2008

Earlier this week, I wrote about “nontoxic” financial stocks, focusing on banks, brokers and other financial institutions that prospered despite tough times. (The accompanying slideshow by Ricky McRoskey is here, and I also talked about the story briefly on CNBC today.)

Looking at how many financial stocks have suffered in the past year, it’s hard to be optimistic about the sectors’ prospects. Especially as the financial crisis drags on, housing prices continue to fall and the Federal Reserve threatens to raise interest rates to deal with inflation.

However, it’s worth putting some of the trouble in perspective. Yes, the trouble hit hard the big banks and investment that made bad mortgages or bought up toxic investments. Those bets killed Countrywide and Bear Stearns, and wounded Lehman Brothers (LEH), Citigroup (C), Washington Mutual (WM), E*Trade Financial (ETFC) and many others.

But Robert J. Ellis of the financial consulting firm Celent, told me he sees reason for hope in the many local and regional banks around the country. Some of their stocks have been battered, but Ellis says, “the mass of the retail community banking market [is] “in great shape.”

As the economy slows down, they’re forced to set aside more reserves for credit losses. “But they are not hurt for the long term,” Ellis says. They’re managing risk fine, and, most importantly, they’ve been through banking crises like this before. “They know how to handle it.”

Ellis pointed to a couple other positive trends for financial stocks: As far as we know, people are still putting money away for retirement. “I don’t hear of too many people abandoning their 401(k)s,” he says. Finally, he said, there’s just not that much panic out there.

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About

Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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