Best Bank Stocks to Buy Now
Sam Subramanian PhD, MBA
'Regulators shut banks in California, Maryland, and Minnesota'
'Regulators shut Guaranty Bank - 2nd largest failure'
'Regulators shut down 2 Arizona banks'
Hardly a day passes without news like the above hitting the headlines. The Federal Deposit Insurance Corporation has been busy taking over troubled banks and easing rules to facilitate bank buyouts.
The number of banks on the FDIC's confidential 'problem list' has risen from 305 in the first quarter to 416 at the end of June, the highest since 1994.
Does this mean you should avoid investing in banks?
Not entirely. Why?
When you look at the big picture, problem banks are not a major problem. Most of the troubled banks on the FDIC list are smaller firms with assets totaling about $300 billion. In comparison, just two of the largest bank holding companies, JP Morgan Chase (JPM) and Bank of America (BAC), have more than $4 trillion in assets.
Additionally, there are a few positives worth noting.
- Expanding Margins: Banks are experiencing solid deposit growth, even after slicing interest rates on deposits. They are also keeping a tight rein on operating costs. Banks are taking additional measures to boost margins as well. Wells Fargo (WFC) is expanding its net interest margin by rolling $14 billion of assets in high-yield CDs it retained from the Wachovia acquisition into lower-interest bearing accounts.
- Long-term Benefits from Consolidation: The credit-crisis coupled with government intervention has enabled survivors like JP Morgan, Bank of America, and Wells Fargo to acquire distressed institutions at bargain prices. These acquisitions offer the potential to payoff in the long term through growth in trading and investment banking activities as confidence in financial markets improves.
- Encouraging Signs in Loan Losses and Loan Growth: The delinquency rate on very-short term loans declined during the second quarter. As a leading indicator of credit problems, improvement here is encouraging. Prodded by the government, banks are getting receptive to lend. Banks like Credit Suisse (CS) and SunTrust (STI) are reaching out to clients to provide financing. Bloomberg reports that banks are
increasing loans to buyers of high-yield debt at what may be the fastest pace since the credit-market debacle began in 2007.
- Positive Earnings Surprises: The second quarter earnings report season arguably was a favorable one for banks in the actual vs. forecast game. Leading banks like Bank of America, Citigroup (C), JP Morgan Chase, and Wells Fargo surprised to the upside.
Sure, there are some negatives.
Deterioration in credit quality and lack of economic growth are two bogeys that can delay good times for banks. A third factor, stringent regulations can undermine the long-term profitability of the banking industry.
- Deterioration in Credit Quality: Loan defaults in commercial real estate can present a problem for many banks. Some banks are already seeing loss rates on credit card loans inch into double-digits. With the ranks of the unemployed continuing to grow, there is possibility for subdued consumer spending to force more retailers to default.
- Lack of Economic Growth: Tempered resumption of economic growth can cause loan demand to be weak. It can also reduce demand for fee-based bank services.
- Stringent Regulations: Regulatory agencies and lawmakers are planning to roll out new rules. Such rules cover a gamut of banking operations ranging from consumer protection to derivative instruments. These regulatory changes can curtail opportunities for banks to make money.
Best Bank Stocks to Buy Now
Oftentimes, greatest opportunities for profits in investing arise when risks are high. And, the banking industry witnessed this earlier in 2009. Banking shares as measured by the KBW Bank Index (BKX) are up just 7% since the start of 2009; they are however up a whopping 155% from the March 6 bottom after bank stocks collapsed early in the first quarter.
Given the possibility for further capital gains over the long-term, most investors will find it beneficial to have some exposure to the banking group. While it is tempting to scout for the best bank stock to buy now, bundled products such as mutual funds and ETFs are more a prudent way to go considering elevated bank-specific risks. Mutual funds are also suited for dollar-cost averaging, a tactic that can come in handy particularly if bank stocks pare recent gains in the months ahead.
Mutual fund investors can look at FBR Large Cap Financial (FBRFX) and Fidelity Select Banking (FSRBX). FBRFX has a good deal of exposure to bank stocks and has trounced the BKX benchmark this year.
ETF investors can look at SPDR KBW Bank (KBE), Regional Bank HOLDRs (RKH), and iShares DJ US Regional Banks (IAT). KBE that seeks to track the BKX index has led the other ETFs this year. KBE is a market capitalization weighted ETF with over $900 million in assets; it holds positions in nearly 25 banks.
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