Bank Stocks Explode

I'm no fan of bank stocks, and I haven't been silent with that opinion.

And while bank stocks have exploded, and I mean exploded, in recent weeks, I'm still held down with pessimism. Quite a bit of it. Let me explain.

First, let's not be shy when talking about how much these stocks have rebounded. It's been huge. Have a look:

Bank

Return Since March 5

Citigroup (NYSE: C  )

202%

Bank of America
(NYSE: BAC  )

142%

Wells Fargo (NYSE: WFC  )

112%

JPMorgan Chase (NYSE: JPM  )

63%

American Express (NYSE: AXP  )

36%

Goldman Sachs (NYSE: GS  )

29%

Morgan Stanley (NYSE: MS  )

35%

Yep, we're talking about multi-baggers here.

And why not? Citigroup got the party started by telling the world it's been profitable in 2009! Then Warren Buffett chimed in, saying "banks have the earning power which has never been better on new business going out of this to build capital positions even if they pay low dividends which they're starting to do now."

Shouldn't that be enough to ignite a good, solid rally?

For the time being, and for some banks, yes. As Buffett pointed out, banks' cost of capital is basically nothing. They can borrow money from the Fed at 0% and lend it out at 5%, 10%, 12%, whatever. Provided they're not lending money to Bernie Madoff or Robert Mugabe, they'll make money.

Two important caveats, though: One, the amount of capital banks will be able to stockpile through operating profits won't come even remotely close to covering losses on existing assets in the coming years. For many banks, we're talking about potentially hundreds of billions of dollars in estimated losses, and billions more to rebuild capital levels.

Second, even Buffett's enthusiasm came with a warning: "The only worry in that is the government will force [banks] to sell shares at some terribly low price."

But that's exactly what the government is doing. Citigroup just handed over 36% of itself to Uncle Sam, and I've shown how Bank of America could easily be next in line. Just yesterday, bank analyst Meredith Whitney told Charlie Rose, "It is just a question of not if the banks need to raise capital, it's when."

No one has a clue, but I think it's rational to assume that a few big banks will ultimately will die, and the remaining ones will look like utilities -- onerously regulated. Problem is, this business and government actions are so opaque that you won't know who the winners are until after the fact, and even then, the industry might look extremely different going forward, making it impossible to value 'em in today's environment.

Maybe you feel differently? Feel free to chime in with your thoughts and comments below.

For further Foolishness:

Fool contributor Morgan Housel doesn’t own shares in any of the companies mentioned in this article. JPMorgan Chase is a former Motley Fool Income Investor selection. American Express is a Motley Fool Inside Value pick. The Fool owns shares of American Express. The Fool has a disclosure policy.


Read/Post Comments (13) | Recommend This Article (27)

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 March 19, 2009, at 2:42 PM, Firstapple wrote:

    I may not be as savvy as many investors out there but I can rationalize with a little common sense. The government has already demonstrated time and again that there are certain banks that are just too big to let go under and they've backed their words with billions of dollars. Right now, Citigroup is hanging around the $1-$3 range for stocks, a rate that I don't remember ever seeing before in my lifetime. Although there will be ups and downs during the present moment with the uncertainties that are out there, there is one thing that is for sure; the government has already invested too much to let them die now. That means Citigroup, BOA, and the other large banks will still be here in a few years and will one day become strong again. To me, a little investment now while its down at $2/share could easily give a 1000% or more return if the investor is willing to wait 3-5 years. Again, I'm no hotshot nor am I a multi-millionaire but as a middle class investor that's looking to get myself on the same playing field as those who have been at this for a lot longer than I have, this is my chance to catch up to the big guys when these banks turn around. Washington has already shown us that they won't let it die and I'm following their multi-trillion dollar bet with a little one of my own.

  • Report this Comment On March 19, 2009, at 3:21 PM, Accountant2 wrote:

    Frankly, l don't buy your doom and gloom.

    if the assets on these banks balance sheets are so danged terrible, then i guess we will have no accounting firms left in a few years. Why do i say that? Well, if you are right, that means that we have Big Four accounting firms signing off on financial statements that are clearly mis-stated - and they will be sued out of business for the huge audit failures.

    But, this is the catch - after watching Arthur Anderson disappear, the Big Four have become about as conservative as a catholic nun. Yet they are signing off on financial statements with all of the "bogus - rotten assets" people like you keep talking about. How is that possible? Are just so much smarter than they are? Or are words cheap for a journalist?

  • Report this Comment On March 19, 2009, at 4:37 PM, pondee619 wrote:

    "to cover losses on existing assets in the coming years."

    Could you explain these losses, where they will come from and how they are calculated?

    I understand that if I lend Joe 20 bucks and he does not repay me at all, I'm out 20 bucks. That is a loss.

    If I lend Joe $20 @ 10% for a year, and he dosen't repay me at all I'm out 20 plus the vig. If he makes a partial payment I'm out less. If he pays me the full amount due, albeit late, but with the full interest paid on the over time. I made money.

    Are the stated Bank losses due to non-performing loans, partially performing loans, fully compliant loans that no one else wants ( and, therefore, have little value because they can't be sold), or something else?

    Please, I don't understand what these losses are. Thank you.

  • Report this Comment On March 19, 2009, at 4:46 PM, Suiname wrote:

    Also what if this stimulus doesn't work and the banks get nationalized? Common stockholders zeroed out.

  • Report this Comment On March 19, 2009, at 7:41 PM, BTN100 wrote:

    pondee619,

    The model you stated is used by regional and smaller banks. It is a great, stable, easy-money plan. But not good enough for some: the biggest banks that got greedy and screwed us all by putting the financial web in jeorpardy. Here's a simplification:

    You lend Joe $20 to buy a house, and he gives you $2/year. Screw that! Who wants 10%? So you say to Fred,"Let's split this deal. I'll take the first $2 in loss, and pay you 8% on the rest. I'm taking the first loss, so I get paid at a higher rate" Fred agrees.Sucker!

    $19@ 8% interest. Now you are are paying $1.44 and keeping $0.56.

    $0.56/$2 = 28% Worse case scenario:

    Fred defaults, you sell his house. No problem. Unless the house REALLY drops in value, but that won't happen...

  • Report this Comment On March 19, 2009, at 7:51 PM, Weitzhuis wrote:

    Are we doomed ? Doomed like we never been doomed before?

    Nah !

  • Report this Comment On March 19, 2009, at 8:10 PM, Smartguy123456 wrote:

    Yeah. forget the bank stocks, it all about food processors.

    I heard that Kraft (with a Mkt Cap: $32.56B) is buying General Mills ( with a Mkt Cap: $15.56B). This is going to be huge as it would create a company with market valuation of +$48B and annual revenues of $55.85B annually. The sygneries alone would be worth $2B annually.

  • Report this Comment On March 19, 2009, at 10:02 PM, Dart65GTConv wrote:

    Everybody not even talking about the best two FNM FRE. trades in 6 months already gave %900.

  • Report this Comment On March 19, 2009, at 10:55 PM, bla777 wrote:

    This whole thing scares me, but I keep trying to make up my losses from last year.

  • Report this Comment On March 20, 2009, at 1:03 AM, socalclint wrote:

    As I look at my worthless WAMU stocks ( a lot of them - 10,000), I can only say that, for me, no banks again. Period. And frankly, while I am almost 100% behind President Obama and his team (except Geitner, man I don't trust him!). But on the plus side, I'm still ahead even w/the losses. I'll stick w/my Pharmaceuticals, Mining & Power. Good luck everyone!

  • Report this Comment On March 20, 2009, at 1:04 AM, CaptainFiveBaggr wrote:

    People that dont realize that the condition of our banks REALLY are that bad are clueless. That being said it is still tough to say if the market will treat them how they would any other stock in any other sector.. I've never seen as much speculation in the banking industry as there is now. I have hope it will all work out, but only caps hope. Not real money hope. GL guys

    A. there was way too much "gloom & doom" rhetoric thrown onto the entire market outside the banking & retail industries

    B. Banks deserved everything they got.

    C. Nationalization is STILL a REAL possibility.

  • Report this Comment On March 20, 2009, at 8:51 AM, pondee619 wrote:

    ihmf7689

    Now I'm really confused.

    "Fred defaults, you sell his house" I thought that Joe bought the house with the money I lent him. Even if Joe defaults and the value of his house drops, there is still some value to the paper. The value of the house less forclosure costs.

    Not every mortgage/loan is in default. many many of these loans are performing, either totally or partially. There is a discounted cash flow formula for deciding what these things are worth. $X being paid on $Y total loans.

    Can anyone explain the problem in bank losses on existing assets? Please?

  • Report this Comment On March 20, 2009, at 11:11 AM, veritask3 wrote:

    I wouldn't touch the big banks with your 50 foot pole let alone mine, and that's why I haven't had money with them since I first ever opened up a checking account with Wells then quickly left for USAA. I do think there are solid small and mid level banks that you could put your money in and feel very confident for a long time. I am a fan of Bancfirst in Ok. Regional and very conservative lending habits.

    Hopefully the big boys fail soon and get this over with.

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