Financials take a hit but still room for optimism

Financials take a hit but still room for optimism

US financials and housebuilder stocks took a hit on Wall Street yesterday, as investors turned bearish on weak economic data.

The Dow Jones industrial average closed down 2.43%, losing nearly 300 points on the day’s session.

The financial sector lead the decline, losing 4.12%, with stocks across the US banking sector seeing typical falls of 10%.

Investment banks were especially hard hit, with Merrill Lynch (NYSE: MER) losing as much as 14.11% from it’s already struggling share price, and Lehman Brothers (LEH) close behind at 12.23% down.

US national and regional banks also saw sharp falls, with Washington Mutual (NYSE:WM) down 13.33% on the additional warning that creditors may be withdrawing support from the troubled bank.

Mortgage providers and insurers, already heavily damaged by the subprime crisis in the US housing market, were also badly affected. MGIC Investment Corp (NYSE:MTG) lost 20.14%. The Radian Group (NYSE:RDN) was one of the few financials not to see a decline, though the stock is down a sharp 60% since the beginning of June.

While the US financial sector remains under pressure, many analysts are seeing banking stocks as prime picks for bargain hunters.

This is not least because many banks stocks are trading at lows of a decade or more, mostly on an exaggerated fear of their risk as a counter balance to an exaggerated expectation of success a year ago, before the Credit Crunch hit.

Where these banks continue to improve their balance sheets, retain strong Tier 1 capital, and additionally increase revenues, over the mid-to-long term the banking sector could offer excellent growth potential for investors.

While the impact of the Credit Crunch is still very much at work, the banking sector has made itself more resilient to new lending conditions, and many have been working furiously to rebuild their business models on risk-avoidance.


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