Bill Gross, managing director of the world's largest bond fund, said Tuesday, "U.S. banks have not done enough to ensure they are well capitalized, and getting back to a system where retail and investment banking are separated would be attractive in terms of reform."
"The closer we get back to separating the two, I suppose the better from the standpoint of reform," says Gross, whose firm Pacific Investment Management Co. (PIMCO) runs a $242.2 billion total returns portfolio.
His comments are also in connection to MF Global, formally known as Man Financial, which is not a bank, but a futures broker run by former Goldman Sachs chief Jon Corzine. MF Global filed for Chapter 11 bankruptcy on Monday after a tentative deal with a buyer fell apart, reports CNBC. "A top U.S. exchange regulator said the firm failed to protect customer accounts by keeping them separate from its own funds, leading to another shock for commodity markets scrambling to contain the fallout from the brokerage's bankruptcy."
Gross weighs in his opinion: "Wall Street sort of lost its way, in that investment banking became a function not of allocating capital properly, but levering capital and levering the returns on capital as opposed to transferring capital to productive industries."
Echoing his sentiment, Liz Ann Sonders, chief investment strategist at Schwab, said on the topic of the MF Global situation: "It's another hit to the confidence certainly of individual investors who have, maybe rightly so, felt that the whole game is rigged against them." (via CNBC)
He adds that he believes there is a 50-50 chance of whether or not Greece will be dropped from the Euro. Perhaps, he thinks, it would be for the best. The move would be similar to what happened in Iceland, a country that he believes recapitalized properly. "They basically told the banks to stuff it, to basically take their money and go home. Perhaps Greece should do that, or otherwise they're in for a five-, 10-, 15-year period of time of very difficult circumstances."
Bill Gross might be bearish on the financial industry, but we've found several examples where highly profitable banks are trading at attractive valuations.
Now might not be the right time to buy, but there are many quality names to keep on your watch list.
All the banks mentioned below have a track record of being more profitable than their competitors. In addition, all of these banks appear to be deeply undervalued relative to the Graham equation. (If you're looking for a complete explanation of the equation's construction, click here.)
Given the track records of these banks, do you think they will continue to be profitable? Or do you agree with Bill Gross, who has expressed extreme bearishness on the sector's outlook?
Use this list as a starting point for your own analysis. (Click here to access free, interactive tools to analyze these ideas.)
List compiled by Eben Esterhuizen, CFA:
1. Community Bank System
2. Independent Bank
3. NBT Bancorp
4. Tompkins Financial
5. East West Bancorp
6. SVB Financial Group
7. Community Trust Bancorp
10. BOK Financial
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
Kapitall's Eben Esterhuizen and Rebecca Lipman do not own any of the shares mentioned above.
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