5 Bold Banking Predictions for 2013

With 2012 winding down, it's time to look to the future.

There were lots of ups and downs during the past year, with many unexpected events that had an impact on the market. Nevertheless, the S&P 500 is at an all-time high when dividends are included, so it wasn't a terrible year for the market. Predictions are hard to get right, especially if they are about the future, but that won't prevent me from completing this little thought experiment. With that said, here are five bold predictions for the banking sector next year.

1. Big bank CEOs will stay put
Many people that follow the financial sector were shocked by the sudden resignation of Vikram Pandit as CEO at Citigroup (NYSE: C  ) in October. The same people -- myself included -- have pointed to Bank of America (NYSE: BAC  ) CEO Brian Moynihan as the next big bank CEO under the spotlight and next to go. I don't think that this will be the year for that to happen. Though Moynihan has a lot of work left to do at B of A, the worst seems to be behind the bank, perhaps making it the perfect time to buy the bank.

Another big bank CEO rumored to be leaving is Jamie Dimon at JPMorgan Chase (NYSE: JPM  ) , though the rumors are not based on poor performance. In November, Warren Buffett told Charlie Rose that Dimon would be his selection as the next Treasury Secretary when Timothy Geithner steps aside as soon as next year. However, this is looking less likely as we head into the next year, with the leading candidate appearing to be Jack Lew, President Obama's current chief of staff .

2. A big bank will break up
The largest banks in the country are truly megabanks in every sense if the word. By combining traditional and investment banking under one roof, they dwarf even the larger of the regional banks. For example, Wells Fargo (NYSE: WFC  ) , which is currently the fourth-largest bank by total assets , is four times larger than US Bancorp (NYSE: USB  ) , the eighth-largest.

This may be the year that one of these larger banks breaks up, and probably not because they are forced to by the government. After they announced 11,000 job cuts, many pointed to Citigroup as being the first to split traditional banking and investment banking into two distinct companies. Fellow Fool John Maxfield thinks that the layoffs should help "make the bank more competitive in the post-financial-crisis world of heightened capital requirements and lower fee income." I couldn't agree more, but I think that this may be the first step as Citigroup looks to redefine its operations under new CEO Michael Corbat, and that a split of the company will follow later in the year.

3. Mergerpalooza will continue
Banks can use smart mergers and acquisitions to grow their deposit base and expand operations. This year featured a handful of mergers that had direct impact in the regional banking sector. For example, M&T Bank (NYSE: MTB  ) acquired Hudson City Bancorp (NASDAQ: HCBK  ) at a premium, expanding its reach from Connecticut to Virginia. FirstMerit (NASDAQ: FMER  ) announced its acquisition of Citizens Republic (UNKNOWN: CRBC.DL  ) in September, an agreement that will grow its footprint in US Bancorp's home region.

This trend should continue into 2013. While it is hard to identify which banks will acquire or be acquired, there are two banks that I see being major players in the M&A game in 2013. New York Community Bancorp (NYSE: NYCB  ) is already on the verge of $50 billion in assets -- and "stress test" territory -- through its smart acquisitions of failed institutions from the FDIC, and I see it continuing this activity going forward. Huntington Bancshares (NASDAQ: HBAN  ) is another regional bank that could look to expand through acquiring a bank, especially after missing out on Citizens Republic.

4. Smaller banks will continue to shine
The four largest banks had a pretty decent year, including a near double by Bank of America. However, there were some smaller regional banks that outperformed these behemoths, and by quite a substantial margin:

JPM Chart

JPM data by YCharts.

While a return north of 20% is nothing to complain about, if you dig further into some smaller banks, you should be able to find returns nearly three times as large. I expect this trend to continue in 2013, and while I personally don't expect to see a bank like Regions Financial (NYSE: RF  ) return over 60% next year, I do expect it to outperform the likes of JPMorgan Chase and Wells Fargo.

5. Federal Reserve stress tests results
This might not be that bold of a prediction since we all know that the Fed will be releasing the results of the latest round of stress tests early next year. What I am predicting, however, is a performance similar to this past March, which saw 15 of 19 banks pass the tests. With another round of stress tests behind them, I also expect many banks to boost dividends or share repurchase programs, similar to what happened this year. If this happens, 2013 could end up being a very good year to be invested in bank stocks.

Predictions are just predictions
It's hard to say what will happen before it does. If we were able to predict the future, it sure would be a lot easier to invest in the market. Nevertheless, these five predictions will be some of the trends I will be following over the next year as I continue to follow the banking sector. Feel free to share your own predictions in the comments below.

Wells Fargo's dedication to solid, conservative banking helped it vastly outperform its peers during the financial meltdown. Today, Wells is the same great bank as ever, but with its stock trading at a premium to the rest of the industry, is there still room to buy, or is it time to cash in your gains? To help figure out whether Wells Fargo is a buy today, I invite you to download our premium research report from one of The Motley Fool's top banking analysts. Click here now for instant access to this in-depth take on Wells Fargo.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 29, 2012, at 2:25 PM, twitbustr wrote:

    All IMHO. Yet another pump piece on banks and more specifically, on HBAN. The sheer amount of pumping as measured by the plethora of fluff pieces in just the last thirty days is unbelievable. (Put in HBAN in the yahoo search bar for news and you will be overcome) Where were these so called 'writers' for the last two and a half years? Nothing has changed with regard to HBAN's prospects for growth; absolutely nothing, yet like an orchestrated group of lemmings, 'writers' from what seems every online boiler room all show up at the same time, preaching the same message. It is painfully obvious that when hedge funds want a specific outcome to happen to any given stock or sector, they 'employ' these shill, er, 'writers' en mass to enable the desired outcome through sheer volume of favorable (in this instance) piece writing. Personally, I believe that the economy will tank in '13. How can it not with all of the events unfolding both dometically and internationally? Motive here? So the hedgies can file out of the banking stocks in an orderly fashion and lock in their '12 profits while retail investors 'buy' to keep the price up while the 'exit' is happening. Motley Fool and it's own bevy of pump 'writers' should be ashamed of themselves as it is not the org it was promised to be when first envisioned by it's two founders...

  • Report this Comment On December 30, 2012, at 1:04 AM, jlclayton wrote:

    If you want to believe that the MF writers are just 'shills' who are employed by hedge funds, then why read their articles?

    Banking stocks have been very volatile over the last few years, and year end is a popular time for analysis. If you don't have confidence in the banking sector and believe the economy will tank in the next year, then invest accordingly.

    Personally, I have no good opinion of where the market will go this year. So I will continue to build cash to take advantage of better opportunities if the market heads south or enjoy the gains if the bull continues to run. Either way, it will be my responsibility to manage my investing, and I have no intention of bashing others if their opinion on a particular sector does not agree with my own. In fact, my investing will improve if I'm willing to listen to those opinions and evaluate both sides.

  • Report this Comment On December 31, 2012, at 12:09 PM, greenmagpie wrote:

    @jlclayton: word! Thanks for the grounded perspective.

  • Report this Comment On December 31, 2012, at 12:36 PM, pranjan wrote:

    What abt emerging market banks? With all the global turmoil, I am sure there are great opportunities abroad especially with banks. A bit more insight would have been nice considering the title.

  • Report this Comment On December 31, 2012, at 4:17 PM, TheRealRacc wrote:

    Take someone's advice without doing your own research = idiotic.

    Reading Motley Fool articles and constantly bashing the authors = idiotic.

    Buying the right bank stocks and holding for the next 10+ years = genius.

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