Analysts who cover the financial services sector in Canada and the United States are burning the midnight oil on the heels of the recent rally in bank stocks, trying to come up with an answer to the question on everyone's mind:  Is the rebound sustainable?

 

Newly appointed bank analyst for Oppenheimer & Co., Chris Kotowski believes the eventual recovery of the banks will require passage through five phases that will follow for the most part "a clearly discernible and almost 'necessary' sequence:

First is a recovery of interbank lending and normalization of the TED spreads.

Second is a recovery of credit spreads on the existing stock or corporate, asset-backed and mortgage-related debt instruments.

Third is successful investing in distressed debt and corporations, and fourth is the stabilization of non-performing asset inflows at commercial banks.

Last, is the recovery of loan growth.

 

"In our view, step 1 is the precondition for any recovery -- it should benefit all players by preserving the system. We believe this has mostly been achieved," he writes.  Steps 2 and 3, however, will primarily and most dramatically benefit investment banks while steps 4 and 5 will be substantially later in the recovery and generally benefit commercial banks. We believe steps 1 and 2 are currently in process, with only the faintest hints of progress toward step 3."

 

Full article here.