Bank stocks are floundering amid concerns over the limited progress being made in the disposal of bad loans.
The special inspections by financial authorities into problem loans are expected to force banks to boost loan-loss reserves, with many banks feared to fall into capital shortages as a result.
Investors expect disposal of bad loans to provide opportunities to buy bank stocks. But is their judgment correct?
The question is not moot (or has merit) because continuing economic stagnation has aggravated the quality of assets at banks much faster than expected, creating a situation in which bad-loan disposal is followed by new bad loans. Essentially, banks cannot necessarily improve their interest rate profit margins even if they push bad-loan writeoffs.
Basically, investors pay attention to returns on equity, rather than balance sheets. Investors should therefore consider that price rises in bank stocks as a result of advances in the disposal of bad loans will be short-lived.
What is needed to steadily increase bank stocks? Abolition or privatization of governmental financial institutions may be one effective way because they currently drain business from banks. But while this is an option, the bottom line depends on banks' own reforms. Thus a full-scale recovery in bank stocks will not come soon. Until then, investors should take a flexible stance on bank stocks.