The 2013 wildcard is the recovery in the housing market. There have been numerous signs that the housing market has entered into a sustainable recovery, including rising home sales prices, increased new housing starts, reductions in foreclosures which drive sales prices down, and a reduction in overall housing inventory to approximately a 6-month’s supply – the figure which has historically been considered market equilibrium. Rising home prices encourage banks to keep foreclosed homes off the market because they don’t have to realize losses on those loans and can wait to sell those properties at higher prices in the future. Foreclosures are a last resort for banks because they can really adversely affect earnings. A recovery in the housing market also has a multiplier effect on the general economy with every housing construction job creating three additional jobs.
We are cautiously optimistic on the state of the banking industry in 2013. The recovery in the housing market could positively affect bank earnings. The job creation affect of the housing construction industry should increase consumer confidence, which in turn could entice businesses to increase hiring because of an improving economy. Banks would likely make more loans (their most profitable product) because of increased demand from the private sector as the economy improves. Better than expected GDP growth and accelerated job growth would make us even more positive on the industry. Current bank stock price earnings (P/E) multiples indicate investors are not expecting much from banks in 2013. We believe bank stocks could surprise on the upside and as a result see banking industry positives outweighing the negatives.