Financial stocks rose on Thursday after the board that sets US accounting standards said it would give banks more leeway in valuing assets that are a primary reason for the ongoing credit crisis.
Banks have been pummeled by losses tied to writing down the value of certain assets, especially bonds backed by troubled mortgages, costing them hundreds of billions of dollars.
“It certainly seems to be helping the market,” Fred Cannon, chief equity strategist at Keefe, Bruyette & Woods Inc, said of the change in the accounting rule.
Relief from the accounting standards could give banks the ability to minimize losses. But, Cannon noted, adjusting an accounting standard does not change the fundamentals of the economy that are still weak and will weigh on the sector long-term.
In the near-term, investors seem to be welcoming the relief though. The KBW Bank Index, which tracks 24 of the nation’s largest banks, rose 1.8 percent to 29.68 on Thursday.
The Financial Accounting Standards Board said on Thursday it changed its guidelines for so-called mark-to-market accounting. The new guidelines will require companies to value assets at prices based on what they would be sold for in an “orderly” sale as opposed to a distressed sale. The new guidelines will kick in for the second quarter and not be reflected in first-quarter results due in the coming weeks.
Denise Valentine, a senior analyst at Aite Group, also said the change in the rule is helping, adding that it provides some “breathing room” for the beleaguered banks.
“The market weighted everything down at the same time,” Valentine said of risky assets on balance sheets. “This loosening allows for more interpretation.”
Shares of some of the banks hardest hit by investment losses and other loan losses tied to the souring real estate market were among the biggest gainers on Thursday. Citigroup Inc shares rose US$0.06, or 2.2 percent, to US$2.74. Shares of Bank of America Corp rose US$0.19, or 2.7 percent, to US$7.24.
Goldman Sachs Group Inc, which has been among the strongest banks during the credit crunch, also rose after an analyst increased his first-quarter earnings estimate for the bank and another assumed coverage with an “Outperform” rating.
Barclays Capital analyst Roger Freeman increased his first-quarter earnings estimate to US$1.70 per share from US$0.80 per share because the bank will not have to take such severe marks on investments as markets rallied in March and because he revised his fixed income revenue estimate higher.
Credit Suisse analyst Howard Chen assumed coverage of Goldman and gave the bank an “Outperform” rating because of its best-in-class franchise and market position. Chen also noted the bank’s strong balance sheet. Shares of New York-based Goldman rose US$3.93, or 3.6 percent, to US$114.22.
Goldman competitor Morgan Stanley’s shares fell US$0.62, or 2.6 percent, to US$23.11 after Barclay’s Freeman revised his first-quarter estimate to a loss of US$1.30 per share from earnings of US$0.25 per share.
Freeman said Morgan Stanley will likely suffer from more losses on structured debt and real estate investments during the first quarter than he previously forecast.