Salient to Investors:

Bloomberg survey of analysts shows they are most bullish on stocks farthest from their highs – banks. Financial institutions remain 58 percent below the record of February 2007 while analysts raised estimates for profit growth to 21 percent for Q3 and 32 percent for Q4 on signs of a housing recovery. Revenue per share is less than half the amount in 2007.

Bulls say banks will continue to rally as the Fed stimulus boosts earnings. Bears say gains will be limited to traditional lenders as increased regulation will drag down firms that depend on trading and underwriting for revenue.

Michael Shaoul at Marketfield Asset Mgmt said transactional volume increases for consumer, housing and business credit will increase earnings among regional lenders, while those outside of the purer banking model face too much regulation.

Real-estate loans of 7,246 federally insured banks have fallen to $4.09 trillion from the record $4.81 trillion reached in 2008.

More than 30 companies in the 81-stock  S&P 500 Financials Index have been dropped or added in the last five years as their prices plunged and banks merged. Financial companies make up about 13 percent of S&P 500 earnings.

Walter Todd at Greenwood Capital said loan growth is not robust but is picking up, and the fundamental backdrop for domestic-oriented banks will continue to improve.

The growth in earnings has been slowing since the start of 2011 and was flat in Q2.

Peter Kovalski at Alpine Woods Capital Investors said the improvement in home lending reflects a short-term rise in refinancing driven by the Fed and profits show no real growth.

Chad Morganlander at Stifel Nicolaus said financial shares may fall as economic growth remains sluggish and Europe’s debt crisis worsens. Bank stocks will have a tough time providing long-term leadership until household credit is created without monetary or fiscal stimulus.

Charles Bobrinskoy at Ariel Investments says that while regulation requiring higher capital cushions to protect against losses and more scrutiny by the government will constrict bank earnings growth, investors may be undervaluing their potential as all this is priced into the stocks creating a lot of upside.

Real-estate loans 90 days or more past due totaled $112.5 billion in Q2, more than twice the level at the end of 2008, they dropped 2 percent in Q2 and 0.8 percent in Q1.

On September 25, Chris Kotowski at Oppenheimer said credit quality – the prime mover of bank fundamentals – is poised to get better than average, and recommends overweighting banks as steady loan growth and margins.

Credit card debt 90 days past due declined every quarter except one since June 2010, while the $7.5 billion outstanding is less than half the amount at the start of 2010.

Timothy Ghriskey at Solaris forecasts much more improvement for bank earnings as the economy continues to improve, and stock prices follow earnings.

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