The Federal Reserve building in Washington 390 (R).
(photo credit: Jim Bourg / Reuters)
Want to make money? Invest in US banks. Whenever I tell that to clients I
usually hear, “What are you smoking? The economy stinks, banks are going
bankrupt and it’s their fault we had the financial crisis to begin with. They
probably also have so much exposure to European debt that we will have another
financial crisis as soon as Europe implodes.
Why on earth would you want
to invest in them?” The answer is that after getting pummeled for three to four
years, bank stocks got to be cheap. Now they could get a lot cheaper. No one can
predict the future, but for investors looking at things coolly and rationally,
bank stocks have become attractive.
I am not going to toot my own horn,
but in my column last summer I mentioned investing in banks, and they have been
on a tear since then. It’s not only that the stocks were cheap, but fundamentals
started improving and have been ever since.
On Tuesday the Federal
Reserve released the results of the annual “stress test” that they give banks to
test their solvency in “worst-case scenario” economic disasters. The Fed
reported that 15 of the 19 banks tested would have sufficient capital to weather
a financial storm that would have 13 percent unemployment and further housing
price declines of 21%.
Michael Scanlon, a senior equity analyst with
Manulife Asset Management in Boston, was quoted in The New York Times as saying:
“When you put banks under the kind of dramatic scenarios that the Fed did – and
they are still doing well – it tells you how well capitalized the majority of
the banks are coming out of this downturn.”
AP reported: “Federal Reserve
Chairman Ben Bernanke says US community banks are gaining strength despite
moderate improvement in the economy... Bernanke said community bank profits were
higher in 2011 than the previous year and bad loans were decreasing. He also
said they have built up cushions against loan losses.”Learn from history
We are always taught to learn from history. If we look back 20 years we will
find an interesting parallel to today vis-à-vis the state of the banks. The late
1980s and early ’90s brought a banking scandal (funny how they seem to happen
every 10 years or so!) – the saving and loan crisis. Many banks went under (more
than 1,000), there was a government bailout and there was tremendous pessimism
in the sector (sound familiar?).
After all the carnage, the banks that
survived emerged from the crisis in good financial shape.
We then saw
insiders (CEOs and CFOs) start buying shares of their own stock, improved
earnings growth and a wave of consolidation that lasted for the better part of a
decade (think about how your local bank was bought and then that bank was bought
and that one...).
Fast forward to 2012 and things seem similar. While
hundreds of banks closed, many of the survivors are in very good financial
shape. Whether the bailout was a good idea is irrelevant.
relevant is that many banks have clean balance sheets, have repaid the
government loans and have reinstituted or increased their dividends.
the heels of the successful stress test, JP Morgan announced a share buyback and
a hike in their dividend.
Regions Financial also piggybacked their test
results to go out and raise money to be used to pay back the government for the
money they took to get through the recent financial crisis. We have also
recently seen a slew of small banks get bought out.
It sure feels like
history repeating itself.
I am not recommending that you run out and buy
US bank stocks. This is what I would call “idea generation,” and you should
research these stocks carefully before investing.
While buying and
selling constantly and trying to time the market are not always advisable, it is
worthwhile remembering that there are always opportunities in the market,
especially after it has dropped. Analyze investments objectively without getting
caught up in the hysteria and speculation that scares panicked investors, and
you could potentially profit when both common sense and fundamentals
firstname.lastname@example.org Aaron Katsman is a licensed
financial adviser in Israel and the United States who helps people with US