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 (UNKNOWN:HCBK.DL) 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:
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.
Robert Eberhard has no positions in the stocks mentioned above. The Motley Fool owns shares of Bank of America, Citigroup, FirstMerit, Huntington Bancshares, JPMorgan Chase, and 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.