Bank stocks have been rallying since the lows in October 2011.
The chart of the Philadelphia Bank Index shows the upward move of bank stocks from the 2011 bottom. Banks staged a nice rally, but retrenched in March to May 2012 on the European bank concerns and after Moody’s Investor Services downgraded the sector. The group has since staged a rally back to above the 50-day and 200-day moving averages.
Yet while the outlook appears to be encouraging, there is a move amongst some politicians to restrict the size and scope of the big banks as dictated by the Brown-Kaufman amendment. Introduced in 2010, the Brown-Kaufman amendment places a limit on the size of the big banks and the leverage that they can assume on the balance sheets. The proposal is supported by politicians from both the Democrats and Republicans.
Chart courtesy of www.StockCharts.com
A closer look at the statistics supports the growing power of the big banks in America. Assets of the six major banks accounted for about 15% of the country’s gross domestic product (GDP) in 1995; but even with the restructuring of the bank and the increased limits, assets of the major banks now account for about 60% of GDP. In other words, the big banks are getting bigger.
Yet I’m not convinced the government will place a hard cap on the size of the big banks, as Wall Street and these top banks donate lots of cash to Washington.
The reality is that the majority of the big banks have paid back part or all of the government loans.
Bank stocks are showing promise and third-quarter results are expected to provide some upside surprises.
If the status quo is to remain going forward, I expect the bank stocks to continue to strengthen and provide improved results.
But Moody’s has grown wary about the big U.S. bank stocks, especially given their continued appetite for risk in trying to attain profits. Realistically, the big money for banks lies with investment banking and trading, and not with personal and commercial banking.
A bank can make billions from a single high-gamble trade. Could you imagine how long it would take to make this from retail banking fees? This is the reason why many of the bigger bank stocks continue to trade speculatively despite the establishment of the “Volcker Rule,” proposed by economist and ex-Fed Chairman Paul Volcker to restrict some speculative activities. Put simply, banks must satisfy their shareholders.
Moody’s is concerned that some of the bank stocks are vulnerable to risk in the global financial markets. (Read what I feel about the European situation in “Why You Shouldn’t Be Fooled by the Market.”) Here, we are talking about the U.S. bank holdings in European banks and the excess trading risk assumed in trying to make profits for shareholders.
While the banking sector has strengthened to some degree, there is risk, but the Federal Reserve annual stress test in March saw 15 of the 19 U.S. big bank stocks pass the stress test, representing a vast improvement over 2009, when half of the big banks failed. The four stocks that failed the stress test were Citigroup, Inc. (NYSE/C); SunTrust Banks, Inc. (NYSE/STI); Ally Financial; and MetLife, Inc. (NYSE/MET).
I feel the climate for bank stocks is much better and worthy of a look. I view pullbacks as opportunities to accumulate shares, as I remain longer-term positive on the big banks unless the big banks are restricted in size and scope.