If Banks Don’t Trust Each Other, Why Should You Trust Them?

bank stocksOne of the most common questions I get asked is about bank stocks. Investor sentiment for bank stocks has oscillated from panic selling to a mad rush to buy them. One of the things to take into account is that, even though the water in the U.S. financial industry has been somewhat calm, the situation is still quite fragile. Bank stocks are not the pillars of responsibility they once were many years ago. The latest example is JPMorgan Chase & Co. (NYSE/JPM), which announced $2.0 billion to $4.0 billion in losses related with European trades, the details of which are located in the article: What You Don’t Know About Banks Will Hurt You.

But the current environment in U.S. bank stocks pales in comparison to Europe. The investor sentiment there is so bad that even banks are starting to refuse to do business with each other. If bank stocks don’t trust other bank stocks, how can an investor rationally invest in any of them? This is what caused the financial crisis in 2008, as liquidity dried up amongst bank stocks in the U.S., ultimately leading to the demise of one of the oldest bank stocks: Lehman Brothers Holding Inc., established in 1850.

The latest information from the Bank for International Settlements shows that European cross-border lending between bank stocks plummeted in the fourth quarter. According to the report, this was the lowest level of European cross-border interbank lending since the financial crisis in 2008! People who are discussing the possibility that bank stocks are turning the corner are not seeing what’s happening behind the scenes. This drop isn’t only for the periphery countries like Greece, but also in between Germany, France and the rest of the eurozone bank stocks.

While the European Central Bank (ECB) has provided some short-term relief with liquidity, this condition cannot continue forever. Investor sentiment will remain poor if banks don’t trust each other. And, believe me; the guys running bank stocks know a lot more about other bank stocks than you or I do.

NBG Chart

Chart courtesy of www.StockCharts.com

Take a look at one of the ugliest bank stocks I’ve seen in a long time. Obviously investor sentiment has completely gone out the door with National Bank of Greece S.A. (NYSE/NBG). I’m sure there have been people saying that this stock is “cheap” all the way down over the last three years, from over $40.00 down to under $2.00. I would suggest avoiding the bank stocks of the periphery nations. Perhaps if an announcement were to occur by the ECB regarding recapitalizing the bank stocks, some of the strongest names might be attractive for a trade. A trade only, as I think the European Union is not out of the woods and this pain will hurt bank stocks that are primarily focused on that continent.