The 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 directors viewed the appointment of Corbat as a beneficial investment strategy. The first reason is that his latest role was CEO of Citigroup’s Middle Eastern, African, and European division. Even though some bank stocks are in trouble in Europe, its international presence is still important over the next 20 years as an investment strategy.
The second reason Corbat should outperform Pandit is that he has a better relationship with the regulators. He was head of Citi Holdings, a division in which he reduced over $500 billion in assets to diminish risks. Pandit was rumored to have had difficulties in dealing with regulators. In this day and age, bank stocks need to work hand-in-hand with the regulators in implementing tighter and tougher rules on operational issues. Plus, he’s proven that he’s very capable of reducing risks and focusing on core strengths. Ultimately, the return on investment (ROI) needs to be greater than the cost of capital. That’s the true focus for driving shareholder returns.
Chart courtesy of www.StockCharts.com
All bank stocks have had a tremendous run since the summer. As an investment strategy, the best time to purchase bank stocks was in mid-August when many, such as Citigroup, were breaking up through their downtrend. With Citigroup approaching its year-high and the Relative Strength Index (RSI) being slightly overbought, I would certainly urge some profit-taking as an investment strategy.
For the long term, one has to consider many factors when calculating an investment strategy for bank stocks. Obviously, with the European debt crisis still unfolding, there are significant risks for many international bank stocks. However, Citigroup does trade at a significant discount-to-book value, and if the new CEO is able to increase the firm’s ROI from the extremely low level it is currently at, the long term could still be bright. Over the short term, I would think some pullback is certainly possible. However, for my money, until I see a strategy for increasing ROI, I would focus on the leading firms, such as JPMorgan, or the regional bank stocks.