Are Big Banks Making a Comeback?
The subprime credit crisis that surfaced in 2008 drove Lehman Brothers to bankruptcy, along with causing significant upheaval and driving the U.S. and global economies into a global recession. The aftermath was a structural change to the way banks do business, specifically, the amount of risk assumed by a bank via sophisticated strategies.
The majority of the big banks have paid back part or all of the government loans. Bank stocks are showing promise and the third-quarter results are expected to provide some upside surprises. Of course, the impact from the stalled European economies is a wildcard.
The chart of the Philadelphia Bank Index shows the upward move of bank stocks from the 2011 bottom. Banks staged a nice rally, but retrenched in March to May 2012 on the European bank concerns and after Moody’s Investor Services downgraded the sector. The group has since staged a rally back to above the 50- and 200-day moving averages.
Chart courtesy of www.StockCharts.com.
Moody’s grew a bit wary about the big U.S. bank stocks, especially given their continued appetite for risk in trying to attain profits. The reality is that the big money for banks lies with investment banking and trading, and not personal and commercial banking.
A bank can make billions from a single high-gamble trade. Could you imagine how long it would take to make this from fees for retail banking? This is the reason why many of the bigger bank stocks continue to trade speculatively despite the establishment of the Volcker Rule, proposed by economist and ex-Fed Chairman Paul Volcker to restrict some speculative activities. The reality is that banks must satisfy their shareholders.
Moody’s classified the big banks into three categories from the top banks designated in group one to the highest-risk banks in group three, in which you find the Bank of America Corporation (NYSE/BAC), Citigroup, Inc. (NYSE/C), Morgan Stanley (NYSE/MS), and The Royal Bank of Scotland Group plc (NYSE/RBS).
The concern expressed by Moody’s is that some of the bank stocks are vulnerable to risk in the global financial markets. We are talking about the U.S. banks’ holdings in European banks and the excess trading risk assumed in trying to make profits for shareholders.
The second riskiest group of bank stocks is comprised of The Goldman Sachs Group, Inc. (NYSE/GS), Deutsche Bank Aktiengesellschaft (NYSE/DB), and Credit Suisse Group AG (NYSE/CS).
And, according to Moody’s, the most stable bank stocks include JPMorgan Chase & Co. (NYSE/JPM), HSBC Holdings plc (NYSE/HBC), and Royal Bank of Canada (NYSE/RY).
While the banking sector has strengthened to some degree, there is risk. However, 15 of the 19 U.S. big bank stocks passed the Federal Reserve annual stress test in March, representing a vast improvement over 2009, when half of the big banks failed. The four stocks that failed the stress test were Citigroup, SunTrust Banks, Inc. (NYSE/STI), Ally Financial, and MetLife, Inc. (NYSE/MET).
I feel the climate for bank stocks is much better and worthy of a look. I view pullbacks as an opportunity to accumulate shares, as I remain longer-term positive on the big banks.