Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

Bank Stocks

There are thousands of banks in the U.S., with a few big banks. Bank stocks are publicly traded financial firms that are involved in taking deposits and issuing loans and mortgages, along with other financial services. Big banks tend to cover the entire nation, including an international presence, while regional banks cover only a small section of the country. Bank stocks generally pay a dividend. Some bank stocks are more involved in asset management and therefore are more at risk to the overall market.

With Higher Interest Rates Coming, This Is Where You Need to Be

By for Profit Confidential

With Higher Interest Rates Coming, This Is Where You Need to BeWe all know that interest rates are eventually heading higher. It might be in 2014, but more likely not until 2015, when the unemployment rate can decline to 6.5% as the Federal Reserve believes.

But one thing for sure is that interest rates are headed higher. (Read “Small-Cap Stocks the Place to Be—If Economic Growth Is Real.”)

The best way for an investor to take advantage of the situation is to concentrate on big bank stocks.

According to FactSet, the financials will lead the pack in the upcoming second-quarter earnings season, with earnings expected to rise a healthy 17.7%. (Source: “Earnings Insight,” FactSet Research Systems Inc. web site, June 21, 2013.)

The reason why the bank stocks will fare well when rates rise is that they will be able to generate higher revenues from loans as the interest rate-spread widens. That’s how bank stocks make money.

And once the bank stocks return to their original routine of paying out good dividends, they will attract more retail and institutional investors.

And don’t be afraid; bank stocks are much stronger now following the cleaning up and restructuring of the banking sector after the sub-prime credit crisis. Bank stocks can once again be added as long-term holdings.

Recall the bank stress tests by the Federal Reserve earlier this year. As a result of the stricter requirements, bank stocks are more defensive to risk and much improved as far as their balance sheets, liability, and vulnerability to dire market conditions.

The stress test assumed the worst-case scenario for banks and in all, 14 of the 18 banks managed to pass with conditional approval, with … Read More

2013 Could Be Another Big Year for Banks

By for Profit Confidential

Another Big Year for BanksThe major bank stocks all closed off 2012 near their respective 52-week highs. An upside break appears to be in the works, as the banking industry continues to assume less risky businesses, while shoring up their balance sheets and producing stronger units.

The subprime credit crisis that surfaced in 2008 and drove the U.S. and the global economy into a recession was not what we wanted to see. But in some sort of twisted way, the events have led to an industry that has restructured the way banks do business, specifically the amount of risk that is assumed by a bank via sophisticated strategies. So far, the change coined the “Volcker Rule,” set in place by economist and ex-Fed Chairman Paul Volcker, appears to be capping the speculative trades made by the banks, which is good.

Banks have altered the way they do business and have shown positive strides along the way.

In my view, the operating results have been fairly good, and they indicate that the banks are able to grow their business volume across the board during the economic recovery in the U.S.

Moreover, with the housing market and economy continuing to improve, I feel bank stocks will also to gain altitude. (For more on the housing market, read “Why the Housing Market Is Promising but Overextended.”)

The majority of the big banks have paid back part or all of their government loans. Bank stocks are showing promise and delivering better results.

The bank stocks risk has declined, but there are still issues that could hamper the ability of bank stocks to deliver. According to Trepp, about one … Read More

How the Banking Industry’s Changing for 2013

By for Profit Confidential

Banking Industry’s Changing for 2013The damage done from job losses over the past few years has been quite severe. I think the biggest problem going forward is the realization that the economy, during the past decade, was artificially inflated due to easy monetary policy; therefore, many of the industries were operating far above fundamentally sound levels.

One of these sectors that were running far above optimal levels was the financial services and bank stocks sector. During the last decade, bank stocks drove massive growth in corporate earnings that were based on an economy and financial system that were not structurally sound. Following the bursting of the bubble, approximately 300,000 financial services jobs have been eliminated. The end of the job cuts is not yet here for bank stocks.

In the drive to continue generating some corporate earnings, bank stocks are now coming to terms that their future business levels will be far lower than the past decade. This means job cuts will have to continue. In a sign that management finally understands the structural headwinds, Citigroup, Inc. (NYSE/C) just announced 11,000 layoffs in a variety of business sectors. I think that there will be further layoffs among the bank stocks, as revenue growth simply won’t reach the same growth path as previously estimated, which will endanger corporate earnings gains. (Source: “Wall Street Job Reductions Seen Persisting After Citigroup Cuts,” Bloomberg, December 5, 2012.)

As an example, revenue in the investment banking and trading divisions at the 10 biggest bank stocks is estimated to rise 2.8% in 2012 to $148 billion; however, this is 32% below the 2009 levels, according to Coalition Ltd. (Source: “Wall … Read More

New CEO at Citigroup; Will Anything Change?

By for Profit Confidential

New CEO at CitigroupThe last two years have obviously been extremely difficult for bank stocks. The financial crisis that took hold of not only America but the rest of the world as well has caused extreme strain across the entire financial sector. However, since the financial crisis several years ago, American banks have substantially shifted their risk and investment strategy and are on a much more solid footing now.

While smart investors used the selloff in bank stocks as an opportunity to buy, this investment strategy has not worked for all firms. Not all bank stocks have recovered what they lost, even though they all went up massively this year. While some bank stocks like JPMorgan Chase & Co. (NYSE/JPM) are only down approximately five percent over the last five years, Citigroup is still down a massive amount. Recently, the CEO of Citigroup, Vikram Pandit, was ousted by the Board of Directors, mainly due to the fact that during his tenure, the stock has gone down over 85%.

While he did take over during a difficult time for bank stocks, his investment strategy is obviously flawed. The Board of Directors has decided to appoint Michael L. Corbat as the new CEO. When it comes to bank stocks, Corbat appears to be an interesting choice. First, he’s a long-time member of the Citigroup family. He’s also slightly lower-key than top CEOs like Jamie Dimon. Communicating confidence and leading is extremely important for a CEO. Obviously, considering the strong rebound in the share price and performance of JPMorgan, Dimon is the true standout amongst CEOs for bank stocks.

I see two reasons the board of … Read More

JPMorgan Set to Continue Higher in Spite of Frivolous Lawsuit

By for Profit Confidential

JPMorgan Set to Continue Higher in Spite of Frivolous LawsuitWhen it comes to bank stocks, it seems that JPMorgan Chase & Co. (NYSE/JPM) is Public Enemy Number One. It’s unfortunate that so many retail investors have such a negative market sentiment towards JPMorgan since it has the potential for large returns, with a dividend yield of 2.9%.

The latest cheap shot is nothing short of a publicity stunt by a future politician, as the office of New York Attorney General Eric Schneiderman has just filed a civil lawsuit against a unit of JPMorgan, The Bear Stearns Companies, Inc., for alleged fraud.

Of course, I don’t condone fraud; in fact, I think the penalties we have are far too lax when it comes to all companies, not just bank stocks. The problem is that this is clearly not about what’s in the best interest of America, but rather the need for a high-profile case to catch the public attention for the Attorney General to move up the rungs of the political ladder.

When bank stocks were in the middle of the financial crisis several years ago, market sentiment for the group was extremely poor. No one was willing to lend or help out other bank stocks with such a negative market sentiment. The federal government essentially forced JPMorgan to take over Bear Stearns. Initially JPMorgan balked, stating that it didn’t have enough time to conduct due diligence. The federal government essentially said, “Don’t worry; we’ll cover you.”

Now that the political tide on bank stocks has shifted with market sentiment, the bull’s-eye is on the back of JPMorgan, among other bank stocks. Obviously, this is a lesson: if you are … Read More

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