Friday, September 19, 2008

Raising Banking Sector to Overweight -RBC Capital

RBC Capital is moving their rating on Banking Sector to Overweight:

Gathering of Powerful People: Thursday night Congressional Leaders, The Treasury Secretary and The Federal Reserve Chairman jointly announced a cooperative effort to get ahead of the credit crisis. The plan is expected to be delivered to Congress in the next 24 hrs:

Expected Key Components of Plan: 1) Create a mechanism that would take bad assets off the balance sheets of all financial companies 2) create federal insurance for investors in money-market funds 3) ban short selling of financial stocks through year end.

Resolution Trust Corporation (RTC) II: RBC anticipates a key component of the Treasury plan will be the creation of a govt. entity that will buy bad assets similar to the RTC in the late 80s-early 90s.

The Devil is In Details: The headlines are very appealing to bank stock investors but the critical information about the plan will be in the detail. Important details include determination of sales prices of bad assets, capitalization and funding of RTC II, what assets will qualify to be sold to
RTC II, and length of the ban on shorting financial stocks.

Short Sellers Run Out of Town: A key component on our group weighting change is the proposed ban on shorting bank stocks through yr end. Heavily shorted stocks will be targeted by aggressive buyers to squeeze the shorts, in firm's view

The expected plan by the govt. will lead to higher bank stock prices through the end of the year. High equity prices will allow companies with rising credit problems to raise additional equity to handle the expected higher charge-off levels. The ability to dump assets to the govt. will
enable companies to return to normality quicker than earlier anticipated.

RBC believes the US govt's plan will lead to an acceleration of M&A activity. They also believe since the US Govt. is creating new rules to solve this crisis, temporarily suspending purchase accounting for acquisitions could be implemented. Pooling of interests deals will allow big problem banks to be acquired by healthier bank.

Notablecalls: Money center banks (JPM, WFC maybe even BAC) look like the safest bets. If you want more risk, try some GS. High octance bets include WB and MS.

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