The banking industry has definitely come a long way since the end of the financial crisis. The vast majority of U.S. banks are much better capitalized and have significantly better asset quality than they did just five years ago.
Here are three banks in particular that could have a very good year in 2015, along with what results investors in them can look forward to.
A great play on the continuing economic recovery
One of the best ways to invest in the recovering U.S. economy is with Wells Fargo(NYSE:WFC). Unlike the other "big four" banks, Wells Fargo focuses most of its efforts on its retail banking activities. In fact, about 60% of Wells Fargo's revenue comes from traditional consumer banking activities like lending.
And the efforts have paid off. In 2014, Wells Fargo overtook Ally Financial as the top U.S. auto lender, and it is the largest U.S. mortgage lender. The bank has also done an excellent job of growing its credit card business, and the percentage of the bank's customers who have a Wells Fargo-issued credit card has grown from 36% to nearly 40% in the past year alone.
Wells has stated its intention to get a credit card in the wallet of every one of its creditworthy banking customers, so this could be just the beginning. Additionally, Wells Fargo recently partnered with American Express to expand its credit card offerings, and it will be interesting to see if this has a big impact going forward.
Another reason to love Wells Fargo is the progress it has made in its retail brokerage business in just a few years. The company's brokerage and wealth management business was nonexistent until the 2008 Wachovia acquisition. Since then, it has grown to be a real power player in the industry.
Plus, the brokerage attracts very high-quality banking customers. The average Wells Fargo customer has about six products with the bank, while the average brokerage customer has 10.
In a nutshell, Wells Fargo is poised to take excellent advantage of the increasing amount of disposable income in the U.S., as well as loosening credit standards, which are still pretty tight on a historical basis.
If M&A and IPO activity stays high
All of the major investment banks did very well in 2014 in terms of equity underwriting and M&A advisory revenues thanks to strong market conditions.
When the market is high, companies can get higher prices for their shares, so they are more tempted to complete IPOs, and mergers are more likely to take place as companies have better access to credit and can offer higher prices to their target companies.
Of the investment banks, it's tough to make the case that any has performed better in these areas than Morgan Stanley(NYSE:MS). The company recently announced an extremely impressive third quarter that included a year-over-year revenue increase of 10%. And perhaps the most impressive parts were the advisory revenues from M&A, which increased by 43%, and the company's equity underwriting revenues, which nearly doubled from the same time last year.
With the stock market continuing to reach record highs, it seems reasonable to believe that this high level of activity will continue into 2015 -- and Morgan Stanley is an excellent way to play it.
Even though it's still a pretty risky investment, I think Citigroup (NYSE:C) could have an excellent 2015, for a couple of reasons.
First, the company continues to get rid of its riskier assets. The Citi Holdings division, where the bank has parked its "legacy" assets, has been reduced in size from $290 billion in 2011 to $103 billion currently. And while $103 billion is still a lot of questionable assets, this is movement in the right direction. Plus, bear in mind that Citi Holdings is definitively profitable, producing $1.6 billion in revenue during the third quarter -- a 26% year-over-year rise.
Second, I think there is an excellent chance that Citigroup will finally be given the green light to increase its dividend. The improvement in Citigroup's Basel III supplementary leverage ratio (6% versus 5.1% a year ago) puts the company in an excellent position going into the March "stress tests" and could persuade regulators that it's time for an increase.
A dividend increase would do wonders for Citigroup in terms of shareholder confidence, and further winding down of the legacy assets would add a sense of stability. While there are still plenty of risks, such as Citi's high exposure to emerging markets, there is good reason to believe the bank will have a great 2015.