Financial Stocks Face Stiff Headwinds, Citigroup's Levkovich Warns

Tobias Levkovich, chief U.S. equity strategist for Citigroup (C), offers a fairly grim outlook for financial stocks in his latest note to the bank's clients. He equates the sector to technology in the early 2000s, when it plunged, snapped back strongly and then produced mediocre results for several years.

Levkovich, who has called the ups and downs of the market very well for the last couple of years, expects something similar from financials. These are the bleak facts, as he sees them:

"As the Congressional wheels turn with the focus on the 'Volcker Rule,' consumer protection factors, too big to fail, capital requirements and even an attempt to reinstate Glass-Steagall, it seems difficult to argue that financial company management teams can formulate and implement effective strategic decisions, especially when the impact of deleveraging remains unknown. Thus, market performance appears more likely than any recurrence of another big bounce across the sector. However, specific names could still provide handsome returns."
He didn't stop there:

"...Any threats to the value of assets on the books will affect shareholders' equity since liabilities have to be paid back at par. Given the likelihood of higher interest rates due to the Fed's planned liquidity withdrawal, there may be some pressure on asset values, limiting the ability for financial stocks to soar. Earnings revisions momentum and valuation criteria are not that supportive either."
His catalogue of shortcomings for the sector suggests that his forecast of market performance is too generous. Financials have doubled the return of the broad market since the lows a year ago, but they have lagged since mid-October. If his analysis of their business prospects is accurate, continued underperformance seems likely.