Four and a half years ago, when I started my real-money portfolio, Bank of America (BAC -3.75%) was one of my inaugural buys.
Since then, the U.S. economy and the U.S. banking system as a whole -- and Bank of America in particular -- have steadily stabilized. The unemployment rate has been under 6% for more than half a year now, banks (especially the large ones that can hold us hostage economically) are being forced to hold more capital for the next rainy day, and Bank of America believes there aren't any more mortgage-related litigation bombshells left from the financial crisis.
This hasn't gone unnoticed by the stock market, either, which makes finding great buys harder. That said, I continue to hold the long-term view that banking as a whole will outperform the rest of the market -- think the decade after March 2009.
With that as an overview, let's discuss why I'm buying more shares of Bank of America, Fifth Third Bancorp (FITB -1.23%), and Capital One (COF -1.45%).
Bank of America
The buy thesis on Bank of America is twofold:
1) At a basic level, at three-quarters of book value (1.1 times tangible book), it's undervalued if you believe in an overall recovery of the banking sector. Given some of its protection as a too-big-to-fail bank, that would even potentially be true if Bank of America were slightly below average as an operator.
2) If you're more bullish, you could argue that though B of A was quite acquisitive, it wasn't a poorly run bank operationally until it folded in Countrywide's problems in 2008.
The first one gives me comfort, the second one gives me a bit more excitement. If the second one isn't true, though, then the next financial crisis could make owning Bank of America an unpleasant experience.
In either case, the hope is that as the mortgage-related drag on earnings dissipates and the dividend is eventually raised (in the recent Fed stress tests, B of A was conditionally allowed to do some share buybacks, but kept its nominal dividend at a nickel a quarter), Bank of America's stock price can recover to something well above book value.
Fifth Third Bancorp
While buying Bank of America is an exception for me because I generally try to stay clear of turnaround situations, Fifth Third is a great example of the type of bank I like having in my portfolio.
It appears to have been solidly run for years, its business model is fairly vanilla, there was nothing conditional about it passing its stress test, and it pays a nice dividend of 2.7%.
One thing that may concern investors looking at its numbers is its top line shrinking from 2012 to 2013, and then again in 2014, while its return on equity slipped just below 10%.
When you factor out gains on sales of assets (they were quite light in 2014), which are almost always lumpy, what we're seeing is pretty flat revenue over the last three years. Others may disagree, but in banking, I care more about a bank being conservatively run than I do about growth. In other words, sometimes low growth just means that a bank isn't overstretching itself and making bad loans to keep sales moving up. I'm not sure if that's the case here, but I'm comfortable giving Fifth Third the benefit of the doubt.
Capital One
It's hard to call a large bank an "innovator" if you're not a paid public relations professional, but Capital One truly has been one over the years under the leadership of its co-founder/CEO Richard Fairbank. Capital One's credit card business has been on the cutting edge on the data and marketing side pretty much since it began just over a quarter century ago. And more recently, it's been a major player in the online banking space.
What I originally liked about CapOne back in December 2013 still holds true today. Unlike earlier in its history, its loans are now fully supported by its deposits, and its loans are varied beyond its credit card business. Add in the innovative culture, a successful stress test, and a rising dividend payment at a reasonable price (P/TBV of 1.5, P/E ratio under 11), and you've got my attention.
The credit card business could be especially hard hit if the economy turns, but I was pleased with its performance during the last financial crisis, so I'm comfortable with the opportunity versus the risk at today's prices.
For all these reasons, later this week, I'll be adding more shares of Bank of America, Fifth Third, and Capital One in my real-money portfolio. Click here to see the rest of my portfolio and follow along.
