A Danger to Bank P/E Ratios

There's a lot of talk about new rules and stricter regulations decreasing bank margins, but many would be surprised by the relatively low P/E ratios seen among banks. analyst Anand Chokkavelu looks at the numbers for several popular banks across the sector, all with much lower P/E ratios than you might expect. JPMorgan Chase  (NYSE: JPM  ) , for instance, comes in with a ratio just below 10. 

The explanation here is that banks are making a killing on mortgages these days. People are refinancing due to the favorable economic enviroment, and banks are selling them into mortgage-backed securities at low rates. All of the banks that Anand mentions rely on the mortgage business, and as long as the housing recovery continues, things will continue to bode well for them. However, if today's low rates and good spreads begin to reverse, these banks' earnings could be compromised. Watch the video above for the full story.

With so many of the big finance firms getting bad press these days, you may be inclined to stay away from the sector entirely, but that could be a huge mistake. In fact, some of the best opportunities over the next few years can be found there, including one small, under-the-radar bank. It’s been called one of "The Stocks Only the Smartest Investors Are Buying." You're invited to learn about this stock and more in our exclusive free report -- just click here now to get started.

Anand Chokkavelu has no positions in the stocks mentioned above. Matt Koppenheffer has no positions in the stocks mentioned above. The Motley Fool owns shares of JPMorgan Chase and Wells Fargo and has the following options: short OCT 2012 $33.00 puts on Wells Fargo and short OCT 2012 $36.00 calls on Wells Fargo. Motley Fool newsletter services recommend Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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