Your Investments: US banks continue to get healthier

No one can predict the future, but for investors looking at things coolly and rationally, bank stocks have become attractive.

The Federal Reserve building in Washington 390 (R) (photo credit: Jim Bourg / Reuters)
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.
What is relevant is that many banks have clean balance sheets, have repaid the government loans and have reinstituted or increased their dividends.
On 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 return.
Aaron Katsman is a licensed financial adviser in Israel and the United States who helps people with US investment accounts.