Bank Stocks: Is it Safe to Buy Them Now?

The big banks have steadily recovered since the Lehman Brothers collapse in late 2008 that sent bank stocks in a punishing downward spiral, which inevitably required hundreds of billions of dollars in bailout funds from Uncle Sam to save the U.S. banks from collapse.

In my view, this chaotic event was an opportunity that may surface only a few times and times of chaos are when you could make big money.

What was clear was that the newly minted President Obama couldn’t allow the big banks to fail even though they were responsible for the subprime mortgage and credit crisis around the world. If the big banks collapsed, this would have likely triggered a mass selloff in the U.S. and thrown the U.S. economy into a depression instead of a recession. The housing market is showing signs of improvement in spite of continued price pressures, which you can read about in U.S. Housing Market: Anatomy of a Recovery.

There was absolutely no way the government would allow the big banks such as Bank of America Corporation (NYSE/BAC) and Citigroup Inc. (NYSE/C) to fail, as it would drive down banking competition nationwide, which would not be good for competition and confidence in the U.S. banking system.

The concept of chaos generally provides a great opportunity to make some easy money. On March 5, 2009, Citigroup could have been bought for $1.02 a share. The stock is currently trading at a post-consolidation price of $36.78 after a 10-for-1 stock adjustment. A block of 100,000 shares could have made you a cool $266,000 in two years. Citigroup was trading at over $52.00 in August 2009, so the gains could have been higher.

This is the kind of opportunistic buying that sometimes presents itself. It will happen again; maybe not in the big banks, but somewhere. You just need to be alert.

I continue to like the progress of the big banks, but remain concerned with some of the stuff on the balance sheets and the government’s restrictions on banking activities. The recent Federal Reserve stress test pointed to an improved banking sector, but there remain some issues. In all, 15 of the 19 U.S. big banks passed the stress test. The result was a vast improvement over 2009, when half of the big banks failed. Citigroup failed and will divest banking assets in Turkey, India and China to meet the requirements.

The Volcker Rule proposed by economist and ex-Fed Chairman Paul Volcker to restrict some speculative activities has hurt profits, but also strengthened the banks.

The progress of the banks is evident. We are seeing improved balance sheets and attractive valuation and some of the banks are allowed to increase the dividend payments and buying back of shares.

These are good signs that point to a recovering banking sector.

The ability to pay out dividends and increase dividends will be bullish for banks, as this would attract institutional and retail investors seeking the banks of the past.

In my view, the climate for banks is much better and they are worthy of a look. I view pullbacks as an opportunity to accumulate shares, as I remain longer-term positive on the big banks.