Like Mother Nature, Mr. Market abhors a vacuum.
If the big U.S. banks are less interested in what you and I would call traditional banking, if many regional U.S. banks are cutting back on lending to shrink their balance sheets so that they don't have to raise new capital, if some of the biggest overseas and U.S. financial institutions are exiting entire countries, it's only logical to assume that somebody is going to fill the vacuum.
If you're an investor interested in making a long-term profit in the financial sector, the only thing you want to know is who.
I'm going to give you seven names to research and tuck away until you can buy them at reasonable prices. The rally in financial stocks since March 9 is no more sustainable than any early lead of mine would be in Sunday's New York Marathon. And sometime in 2010, you'll get a chance to buy -- at better prices -- the best names in the post-crisis financial sector. You'll just have to be ready.
I sketched in part of the vacuum that's forming in the traditional banking business in my Oct. 27 column, "Why big banks hate banking." I explained that the biggest and most successful banks post-crisis, such as JPMorgan Chase (JPM, news, msgs) and Goldman Sachs (GS, news, msgs), are bring in the majority of their revenue and an even bigger percentage of their profits from such activities as trading, rather than core banking functions like lending to businesses and consumers. I argued that the example of these big banks -- and their success at generating profits when most of their peers are still producing red ink -- will drive that whole tier of banks toward trading and away from the lending model.
More from MSN Money and MoneyShow.com
Cutting back on new lending
Meanwhile, it's not as if most smaller U.S. banks -- smaller than JPMorgan Chase doesn't necessarily mean small -- are embracing the opportunity to expand their traditional banking businesses. Most of them are still busy selling existing loan portfolios, if they can, and reducing the size of their loan portfolios by cutting back on new lending.The motivation here is pretty simple: Banks such as Comerica (CMA, news, msgs), Fifth Third Bank (FITB, news, msgs), KeyCorp (KEY, news, msgs), Regions Financial (RF, news, msgs), SunTrust Banks (STI, news, msgs) and Zions Bancorporation (ZION, news, msgs) all need to "fix" their capital-to-lending ratios, either by raising more capital in the public markets or by shrinking their lending portfolios.
Video: 3 ETFs to watch for market trouble
The ratio problem gets worse every time these banks issue quarterly reports fessing up to big credit losses and announcing that they're going to put more away in reserves against future losses. Because capital is still tough and expensive for banks to raise, especially if you're a bank still showing a rising tide of credit losses, cutting back on lending is by far the most attractive solution.
These aren't small banks. In stock market capitalization, they range from $9.6 billion for SunTrust to $2.1 billion for Zions. They're big enough to have filled a good part of the void in the traditional banking markets caused by the move toward trading by the country's biggest banks. But their own need to shrink their loan portfolios is making them not the solution but part of the problem.
A greater retreat in Europe
I don't mean to give the impression that this problem is limited to the United States. Banks' retreat from banking may be even greater in Europe, where market forces and European Union regulators have combined forces to create a banking-sector vacuum.On the market side, you have companies such as HSBC (HBC, news, msgs) that have decided to wind down their home mortgage business in the U.S. after generating more than $17 billion in losses.
On the regulatory side, the European Union, determined that banks that have taken government money shouldn't get a competitive edge from the bailout (as Goldman Sachs has in the U.S. from government guarantees), is busy forcing banks to shrink their balance sheets or to lop off whole business units. So Germany's Commerzbank (CRZBY, news, msgs) is being forced to shrink its balance sheet by 45%. ING Groep (ING, news, msgs) will be required to split up its banking and insurance businesses and then sell the insurance unit, and to dispose of its ING Direct U.S. Internet banking business with its $90 billion in assets. (For more on ING, see my new blog post.)
Rate this Article
High
Hey JJ you have an informed, tough crowd here with their discussions. JJ you certainly know how to bring out the worst and the best in all of us. Keep up the good work.