By Michael Patterson
Nov. 17 (Bloomberg) -- The KBW Bank Index's retreat to a 12-year low last week may signal investors in U.S. financial stocks are ``ignoring'' an improvement in credit markets, according to Morgan Stanley.
The financial sector is ``fairly valued to moderately cheap,'' Abhijit Chakrabortti, Morgan Stanley's New York-based head of global equity strategy, wrote in a research note dated yesterday. He recommended shares of Wells Fargo & Co., JPMorgan Chase & Co., PNC Financial Services Group Inc., Bank of New York Mellon Corp. and State Street Corp.
The widening spread lenders earn on the difference between rates on deposits and loans, a drop in interbank borrowing costs, capital injections, industry consolidation and the modification of mortgages to avert foreclosures ``causes us to question whether the BKX should be trading close to prior lows,'' Chakrabortti wrote. BKX is the ticker symbol for the 24- company KBW Bank Index.
``If credit and money markets were to again deteriorate, then the current BKX level could be justified,'' wrote Chakrabortti. ``However, we believe the commitment shown by global policy makers in recent weeks makes this an unlikely scenario.''
The KBW Bank Index has tumbled 45 percent this year as credit losses and asset writedowns at global financial firms approached $1 trillion. The gauge fell to 47.96 on Nov. 12, the lowest closing level since 1996, and ended at 48.40 last week.
Financial companies' financing costs dropped from last month's peaks as central banks provided unlimited dollar funding and governments offered bailouts and guarantees to financial institutions. Credit markets, which began seizing up in August 2007, froze after Lehman Brothers Holdings Inc. collapsed on Sept. 15, destroying lenders' confidence they would be repaid.
To contact the reporter on this story: Michael Patterson in London at mpatterson10@bloomberg.net.
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