Bank analysts are positive on bank stocks -- should you be?

By Nathaniel Popper

Jan. 4, 2012 12 AM PT

Reporting from New York —

The most maligned stock sector of 2011, banks, is headed for a great year, according to analysts who research the sector.

The analysts polled by Bloomberg are predicting that banks will see a 52% rise in profits this year, which would make them a great buying opportunity.

But should you believe these analysts (who, by the way, themselves work for banks)?

The first thing to remember is that this same group of analysts proclaimed banks a great buying opportunity in 2011, just before they became one of the worst investments of the year. While analysts predicted banks would see a 32% bump in profit last year, they actually saw an 18% drop in profit, Bloomberg reports.

The rosy predictions from analysts run up against the gloom and doom that pervades the industry as bonuses drop and pink slips fly.

Looking forward, these predictions run up against the many headwinds facing banks this year. If the European debt crisis should worsen, U.S. banks are likely to be the first to suffer. Already Wednesday, there are a number of new indications of the problems banks are facing, including cutbacks in one of the biggest areas of growth (Asia) and new financial crisis lawsuits.

The tendency of stock analysts to provide overly positive pictures of the companies they cover is nothing new.

One renegade bank analyst, Mike Mayo, wrote a book this year explaining all the pressures on analysts to provide positive coverage of their companies. He pointed out that analysts generally only give negative coverage to 5% of the stocks they cover (“Any first-year business school student can tell you that not 95% of stocks are worth buying,” he told The Times).

At the same time, stock pickers always say that it’s when others are selling that the smart money buys. Yesterday bank shares helped lead the stock market up on the first trading day of the year.

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