Ah, to be a healthy bank that dodged the latest financial crisis in residential mortgages and isn't cowering in fear of the new one in commercial loans.
You'd be Hoovering up deposits from savers looking for safety. Licking your chops at all the tasty businesses that competitors not as skillful or lucky were selling off at bargain prices. And enjoying the steepest yield curve in 30 years, in which short-term deposits or borrowing costs near zero could be turned into loans prime (currently 3.25%) or better.
Heaven.
Actually, a bank doesn't have to be quite as pure as the driven snow to enjoy that paradise. You could even have taken a bath in the financial crisis. Issued mortgages to deadbeats. Bought your way into businesses you didn't understand at what turned out to be the peak of the market.
You could have done any and all of that -- and still be in a position to clean up on the woes in the financial sector -- as long as you've recovered more quickly than your peers. So desperate are investors and regulators for anyone to take the worst turkeys off their hands (before they turn into billion-dollar liabilities) that all past sins are forgiven, provided you've got a balance sheet now that looks strong enough to bear the load.
Banks such as these -- I call them reformed sinners -- are to me the most interesting and potentially profitable segment of the banking sector. Because they didn't dodge all the damage of the financial crisis, they didn't snap up big deals in the early days. So they're not full up.
But now that they have put their sins behind them to emerge as potential "rescuers," rather than candidates for rescue, they're in a position to pick through what is still a most attractive and still growing pile of distressed financial companies.
I've got two banks like this to tell you about. One I'll add as a buy to Jubak's Picks. The financial sector is correcting now, and it's a reasonable time to add a financial stock. The other I'm going to put on my watch list because the financial sector's correction might have a way to go yet, and what's a bargain now might become a bigger bargain not too far down the road.
(By the way, I'll be launching a formal watch list in January. A number of readers have asked for a watch list, saying it would help them keep track of potential buys. I think it's a good idea, so I'll have it up as soon as the wonderful people I work with can get it built.)
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In the hands of angry regulators
Here's why I think reformed sinners are the best buys in the financial sector right now.Regulators and worried investors have already tapped the most visible survivors of the financial crisis, and banks such as JPMorgan Chase (JPM, news, msgs) are sitting back, stomachs full, still digesting the assets they have "rescued." JPMorgan Chase, for instance, acquired most of Washington Mutual for $1.9 billion to help out the Federal Deposit Insurance Corp. That deal expanded JPMorgan's market share in California, but on top of the acquisition of Bear Stearns and the continuing integration of Bank One, I'd have to say that JPMorgan is done "rescuing" troubled financial companies for a while.
That means investors and Wall Street analysts are looking at something like a finished product. The JPMorgan Chase a year from now will be different from the JPMorgan Chase of today but in ways that are relatively predictable. The changes will be continuations of current trends. The company will integrate and rebrand acquisitions, get costs out, port products from one unit to another to create a uniform selling proposition, and build market share in key businesses by exploiting the base gained in these deals.
There's nothing wrong with predictability, especially when current trends are running so strongly in JPMorgan's favor. But because what you see today is what you'll get tomorrow -- with a little intelligent extrapolation -- the stock is likely to be more accurately priced by the market for its level of risk.
You may ask, more accurately than what? More than reformed-sinner banks that are still in acquisition -- I mean "rescue" -- mode. One of these is U.S. Bancorp (USB, news, msgs).
