All this talk of a double-dip recession is making many investors nervous -- none more so than shareholders of large banks. Even the thought of a second wave of credit defaults and foreclosures has been enough to knock the sector’s legs out from under it.
A very valid case can be made for avoiding financials given the cloudy worldwide macroeconomic outlook, but then again, it’s not often that opportunities are seized by following the herd. Instead, there are clear buy signals being cast by U.S. and European banks that mean now could be the opportunity to cast out that fishing line and see what grabs on to the other end.
Don’t fight inflation
If you always remember that the market is forward-looking, you’ll be less apt to be disappointed over the long term. For banks, the Federal Reserve’s stance on keeping the federal funds lending rate at a historically low 0.25% through mid-2013 has been a boon to the bottom line. Banks are able to borrow at historically low rates, then turn around and profit from that money by issuing loans.
What would be foolish (with a small f) would be to assume that inflation will remain at relatively low levels forever, because history has shown us time and again that this isn’t the case. However, as variable loans reset years down the road, and new loans are issued at higher rates, what ill effects banks might feel from a tightening in loan generations from rising rates should be offset by higher net interest income as quantitative easing ends and a recovery has investors beginning to care more about fiscal than economic issues.
Don’t let one bad apple spoil the bunch
Not every bank is a bad apple, either. A personal holding of mine, Bank of America
Each bank has a drastically different balance sheet and situation, and as I noted just last month, most European banks, including Barclays
Banking on book value
Historically speaking, banks are -- pardon the pun -- primed for long-term success. Following the adage that you buy banks at half of their book value and sell them at two times their book value has been relatively successful. Some banks are already there, including the previously mentioned Bank of America and its partner in chaos during the credit crisis, Citigroup
Even JPMorgan Chase
While these aren’t screaming “buy me” signals, the value in banks is about as unbelievable as I’ve ever witnessed. In 2008, the credit crisis tainted many balance sheets, and it was difficult to determine what was really left when all was said and done. Now, with a little government persuasiveness, banks are considerably better capitalized than they were three years ago. It’s not a stretch to assume that in two to three years, margins will be expanding rapidly and bank earnings are going to soar through the roof. Now might be the right time to bet big on banks.
What’s your take on the banking sector? Share your thoughts in the comments section below and consider adding Bank of America, National Bank of Greece, Barclays, HSBC, Lloyds, Citigroup, and JPMorgan Chase to your watchlist.