5 financial stocks for the long term

By Jim Jubak

The financial sector got hammered in 2007.

Shares of Washington Mutual (WM, news, msgs), the biggest savings and loan in the country, plunged 70%. Countrywide Financial (CFC, news, msgs) dropped 78%. Citigroup (C, news, msgs) fell 47%, Merrill Lynch (MER, news, msgs) 41%, Bear Stearns (BSC, news, msgs) 45% and Bank of America (BAC, news, msgs) 23%.

The first four months of 2008 weren't any better. As of May 8, Washington Mutual was down an additional 19%. Citigroup had fallen 5% more, Merrill Lynch 9% and Bank of America 6%. Bear Stearns tumbled an additional 88% and was bought by JPMorgan Chase (JPM, news, msgs). Countrywide Financial dropped a further 44%, raising the possibility that Bank of America, which had decided to buy Countrywide, would cut the price or drop the deal.

Want to buy a financial stock?

You should, but maybe not today. The mortgage crisis isn't over. Banks are still hoarding cash to buttress their balance sheets. And there's a better than good chance that bad credit card debt, bad car loans and bad commercial loans will take another bite out of the sector.

And you probably don't want to own any of the stocks I've mentioned here. These companies have each taken an invaluable global franchise and turned it into a burned-out shell through greed, stupidity and mismanagement.

Why money management will be big

The long-term reasons to buy financial stocks are intact. First, in the developing economies, rising global incomes are creating huge markets for financial products, such as credit cards and life insurance, that we in the United States take for granted.

Second, an aging global population of hundreds of millions of baby boomers in the world's developed economies and hundreds of millions of newly comfortable Indians, Chinese, Vietnamese, Russians and Brazilians are socking away money for retirement and need somebody to manage it. The meltdown in the financial sector in 2007 and 2008 gives investors a chance to get in on that long-term opportunity at bargain prices.

In this column, I'm going to explain the trend and why you want to own a piece of it. I'll finish by identifying five stocks that you may want to buy -- not yet, certainly, but probably before 2008 is over.

Let's start by looking at the amazing growth of the financial sector in developing economies. In India, for example, global banking giant HSBC Holdings (HBC, news, msgs) saw the number of credit cards it had in circulation grow by better than 60%. At the end of 2006, more than 2 million Indians carried an HSBC credit card.

That's impressive until you note that India has a population of about 1 billion. HSBC's market penetration is roughly 0.2%.

China's banks primed for growth

Or look at the banking market in China, one of the fastest-growing in the world. From 2001 to 2006, total yuan deposits with the country's financial institutions rose at a compounded average annual growth rate of 18.5%, according to Daiwa Investments. Total yuan loans climbed 14.9%, compounded annually, but China's personal loan market, which is just getting started, is growing at a 15% annual rate.

The personal loan market is actually growing more slowly than that for life insurance. Life insurance penetration -- i.e., the total of life insurance premiums written in a country as a percentage of the country's gross domestic product -- in China trails both the world average and the Asian average. According to Swiss Re, the gross life insurance premium per capita in China is $34 a year, compared with $1,790 in the United States and $155 on average in Asia.

Personal accident and casualty insurance shows the same pattern: Penetration in China is just 1.2%, and the per capita premium is just $19, versus $2,134 in the United States.

Think there's room for growth there?

A world going gray

The same is true in India, Russia and, well, pretty much anywhere that economic development is giving people some money to save and at the same time weakening the traditional family-based system of care for the elderly.

Back in the United States (and the rest of the developed world), the market for credit insurance and credit cards is more mature, but that doesn't mean there's no room for growth. In these markets, the fastest-growing business -- and the most profitable -- for banks and brokerage firms is managing money for folks who have a bit of it.

Continued: Paying for pensioners

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