It’s still easy to hate the big banks.
Their list of sins is lengthy. They brought us the credit mess, which sent the economy into a nosedive. They begged for our bailout money, then gave execs sweet bonuses. Many of us owned their stocks and were hit hard when they tanked. They’re still foreclosing on our neighbors. And they nickel-and-dime us with ever-higher fees.
But it’s time to take a deep breath, let go of your anger and learn to love the banks again -- at least as investments. Here's why.
Many banks are reasonably sound again, and they’re only going to get stronger as the economy improves. Their loan books will look better and better. They will soon be handing out money to shareholders, in the form of dramatically higher dividends and renewed share buybacks. These factors will boost financial stocks.
Oh, and most banks have paid back the bailout money at a profit for Uncle Sam.
So don’t be a hater. As an investor planning for retirement, you're writing off a potential ally. In fact, I suggest you consider adding these banks to your portfolio right now: JPMorgan Chase (JPM, news, msgs), Citigroup (C, news, msgs), Wells Fargo (WFC, news, msgs), U.S. Bancorp (USB, news, msgs), Comerica (CMA, news, msgs), 1st United Bancorp (FUBC, news, msgs) and FirstMerit (FMER, news, msgs).
Not there just yet? Well, here are five reasons you need to learn to love the banks:
No. 1: Everyone else hates them
When a prestigious magazine compares an entire sector to a sewage plant, sentiment can’t get much worse. A recent New Yorker article likens banks to just that -- and questions the need for their very existence.Let's dismiss the inconsistency, first of all. We really do need sewage plants, and we do need banks. Without the funding from capital raised by banks, Google (GOOG, news, msgs) would still just be a cool set of algorithms on someone’s hard drive. Without loans and the money that banks help companies raise in the markets, you would have to say bye-bye to lots of new businesses, job growth and economic expansion.
Let's get to the investing angle behind this comparison of banks to sewage plants. I love the New Yorker, but its take shows us how much the banks are still hated -- a sentiment that tends to make stocks very cheap. As a good contrarian investor like Warren Buffett could tell you, you make the big bucks by investing in hated sectors with great potential, then waiting for the sentiment to improve.
"I believe the banking sector in general is probably a pretty good play right now," says William Isaac, a former Federal Deposit Insurance Corporation chairman and the author of "Senseless Panic: How Washington Failed America." He now chairs LECG Financial Services, a financial sector consulting firm. "Their stock prices are way down. They are selling for next to nothing."
At $4.77 a share, for example, Citigroup trades close to its tangible book value of $4.44 a share, says Deutsche Bank analyst Matt O'Connor. Tangible book value measures the worth of assets that have a value that's easy to determine in the market.
No. 2: The economy is improving
It’ll be a long time before many of us forgive the banks for the debacle they helped cause. But as an investor, it's always better to look at the present and future.Banks in general are now much better off than they were two years ago -- with many reporting decent profits, growth and improving financial strength. Profitability measures like return on assets and return on equity have been improving steadily for the last six quarters, according to SNL Financial, a research firm based in Charlottesville, Va.
Three key factors that will help banks move up from here:
- Goldman Sachs economists recently upped their forecast for growth in the U.S. to 2.7% for this year and 3.6% for 2012. If those forecasts are right, bank profits are going to get better as lending increases. "Banks would love to lend more. But they want to lend to good creditors. A better economy turns more weak creditors into good creditors," says Anton Schutz, who manages Burnham Financial Industries Fund (BURFX) and Burnham Financial Services Fund (BURKX), both of which outperform the overall market by a wide margin.
We're already seeing what’s probably the beginning of a pickup in business lending, says Mark Morgan, a senior equity research analyst at Thrivent Financial for Lutherans. Commercial and industrial loans bottomed in September and are up modestly since then. Morgan likes Comerica as a play on this trend, because it has good exposure to these types of loans. Goldman Sachs bank analyst Richard Ramsden believes Bank of America could benefit the most from an improving economy, given its exposure to U.S. consumers and housing. But most banks will see some benefit.
- It also helps that yields on long-term bonds are going up much more than short-term rates, creating what economists call an upward sloping yield curve. Since banks borrow short-term funds and lend them out over the long term, an upward sloping yield curve improves profit spreads.
- Accounting profits should grow as well, as banks continue to release reserves held to deal with bad loans and use the money to reward shareholders. That brings us to the next reason you should learn to love the banks.
Continued: The banks are giving money back
