It’s not enough we have to deal with the dire economic situation in the eurozone and Europe, but now bank stocks are under attack, especially from Moody’s Investors Service, which is negative on the banking sector. The quality of bank stocks has been improving, but clearly the credit rating agency is a bit on the cautious side and likely making up for not being tough enough with its ratings leading up to the credit crisis in 2008 that drove the global economies into a recession.
The European debt crisis led Moody’s to downgrade 16 Spanish banks, seven German banks, and three Austrian banks. As you know, the situation in the eurozone is a mess and will worsen, especially if the global economies stall, which I discussed in “Europe’s Meltdown: The World’s Economies You’ll Want to Keep on Your Radar.”
Moody’s is also growing a bit wary about the big U.S. bank stocks, especially given their continued appetite for risk in trying to attain profits. The big money for banks lies with investment banking and trading, and not 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 fees for retail banking? 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. The reality is that a bank must satisfy its shareholders.
What Moody’s has done is classify the big banks into three categories from the top banks in group one to the most at risk in group three, where you find the likes of the Bank of America Corp. (NYSE/BAC), Citigroup Inc. (NYSE/C), Morgan Stanley (NYSE/MS), and The Royal Bank of Scotland Group PLC (NYSE/RBS).
The downgrades were blamed by Moody’s on some of the bank stocks’ vulnerability to risk in the global financial markets. We are talking about holdings in European banks and excess trading risk in trying to make profits for shareholders.
The second riskiest group of bank stocks comprise of The Goldman Sachs Group, Inc. (NYSE/GS), Deutsche Bank AG (NYSE/DB), and Credit Suisse Group AG (NYSE/CS).
The most stable bank stocks include JPMorgan Chase & Co. (NYSE/JPM), HSBC Holdings PLC (NYSE/HBC), and Royal Bank of Canada (NYSE/RY), according to Moody’s.
While the banking sector has strengthened to some degree, there is risk, but as the Federal Reserve stress test pointed out, 15 of the 19 U.S. big banks passed the stress test, representing a vast improvement over 2009 when half of the big banks failed.
The climate for bank stocks is much better and worthy of a look. I view pullbacks as an opportunity to accumulate shares and I remain longer-term positive on the big banks.