Banking Sector Will Continue To Struggle

Even though the XLF index, which gauges the financials’ movement, rose 24% over the last month, the banking sector might not be out of the woods just yet. A number of analysts and traders are still saying that the banking sector will have to fight for its survival.

Among them, the legendary George Soros said zombie banks are among us, while the new accounting rules will only keep them alive. Meredith Whitney, the well-known analyst who predicted the financials’ decline ahead of the credit crisis, still thinks that banks profitability will not last too long, because their balance sheets are not ready to face a double digit unemployment rate.

Furthermore, UBS’s analyst Alastair Ryan predicts that any positive first quarter earnings will not continue into the second quarter, or after that. He says that most of the earnings came from the fixed-income desks, where the traders were helped by central banks adopting a quantitative easing strategy. Ironically, UBS was among the first banks that said it had profits in the first few months of 2009. Trade Team also believes that is hard to expect banks to post earnings beyond the first part of the year. The number of companies or consumers looking for a loan right now is very small, and is likely to stay that way. Banks saw relatively good and stable profits coming from the credit market, but this is now gone. Additionally, the number of foreclosures and defaults are likely to increase over the coming period adding further strains they said. The move to safety in the greenback may not yet be over, and the fact that the XLF is 70% off last years prices puts into perspective the amount oif work involved in rallying the stock market, and by default that allows the dollar to more easily hold current valuations.