Time to Dump the Banks?

The FDIC released its quarterly report, and it paints a bleak picture for the banking industry. In fact, you might want to dump everything financial after reading it, but I think we can still find some value in America's banks.

First, the key numbers for Q2:

  • Banks and thrifts set aside $11.4 billion for bad loans, a 75% increase over last year.
  • Noncurrent loans increased 10%, with residential mortgage loans accounting for half of the increase.
  • Charge-offs of residential mortgage loans increased a whopping 144%. 

It sounds bad, but none of this should be a surprise. I predicted higher loan loss provisions back in April (OK, smart people made the prediction, and I agreed with them). Anyone who's tuned in to CNBC lately is well aware of the subprime problems and "credit crunch." But I suspect the year-over-year changes are exacerbated a bit by lower charge-offs (uncollectible loans) in 2006 after the bankruptcy reform.

Despite the problems, the Big Banks still look attractive to me as long-term holdings. I'm not alone. Berkshire Hathaway -- the investment vehicle of the legendary Warren Buffett -- actually increased its holdings in Wells Fargo (NYSE: WFC  ) and US Bancorp (NYSE: USB  ) in Q2, and it disclosed a large position in Bank of America (NYSE: BAC  ) . Buffett and his team are conservative investors, so they must see value there.

A Wall Street Journal article also suggests Wachovia (NYSE: WB  ) is undervalued at current prices. Its price-to-earnings ratio of 10.2 is below its peers', and Wachovia recently bumped its dividend 14%. It yields a nice 5.2%.

Furthermore, the strongest banks can be opportunistic in this maelstrom, as we saw with Bank of America's investment in beleaguered Countrywide (NYSE: CFC  ) . According to most reports, Bank of America got favorable terms on its investment. Of course, making a bad bet in this choppy environment can have dire consequences, so it's a double-edged sword. Just ask  Bear Stearns (NYSE: BSC  ) .

In short, don't panic just yet. Value hounds with long investment horizons should be sniffing around the nation's strongest financial institutions.

Learn more from these Foolish takes:

Bank of America and US Bancorp are Motley Fool Income Investor recommendations. Berkshire Hathaway is a selection of bothMotley Fool Stock Advisor andMotley Fool Inside Value. Free, 30-day trials are available on request.

Joseph Khattab does not own shares of the companies mentioned.


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