U.S. bank stocks may rise 10-20 pct in year: Barron's

NEW YORK (Reuters) - Shares of stronger U.S. banks and brokerages may rise 10 percent to 20 percent in the next year as panic over credit markets recedes and earnings improve, Barron's said in its March 24 edition.

The sector will still face negative headlines such as finance company's CIT Group Inc (CIT.N) decision on Thursday to tap an entire $7.3 billion credit line, and perhaps see weaker banks go bust or seek bailouts, Barron's said.

But this month's collapse of Bear Stearns Cos BSC.N may have marked a bottom for the broader market, Barron's said. Bear agreed on March 16 to a buyout by JPMorgan Chase & Co (JPM.N) at a fire-sale price of $2 per share.

Banks have suffered from lower earnings and share prices, hurt by the slowing economy, the housing crunch, an increase in soured loans, and illiquidity in a wide range of debt. Many industry executives and economists have said they expect conditions to remain tough for much of this year, or longer.

Longer-term investors bruised by losses could be forgiven for being unexcited about a 10 percent to 20 percent gain.

Despite an 11 percent jump last week, the 24-member Philadelphia KBW Bank Index .BKX would have to rise an additional 41 percent to reach its February 2007 peak. And the Amex Securities Broker-Dealer Index .XBD, which includes Bear, would have to soar 65 percent to reach its May 2007 peak.

Barron's said a main reason that bank and brokerage fortunes will improve is the large gap between the yield on the 2- and 10-year U.S. Treasury notes, now about 1.72 percentage points according to Reuters data.

This "steep yield curve" makes it easier for banks to borrow short-term money at low rates and lend long-term at higher rates, and suggests the economy may be well along in a recession rather than early in one, Barron's said.

Earnings may also grow faster if the bulk of write-downs for such things as subprime mortgages, collateralized debt obligations and leveraged loans is in the past.

Though first-quarter earnings in the sector may fall by nearly half, third-quarter earnings may rise 34 percent, Barron's said, citing Standard & Poor's analyst Howard Silverblatt.

Goldman Sachs Group Inc (GS.N), Lehman Brothers Holdings Inc LEH.N and Morgan Stanley (MS.N) each reported lower earnings last week, but results were better than analysts expected, and Barron's said write-downs were manageable.

While several analysts have said Citigroup Inc (C.N) may face a write-down in excess of $10 billion, they have projected it may be smaller than last quarter's $18.1 billion.

And having a friendly central bank also helps the sector, Barron's said. The Federal Reserve this month slashed interest rates, and opened its lending window to investment banks, giving them a new and stable source of funding.

(Reporting by Jonathan Stempel, editing by Richard Chang)