The major bank stocks all closed off 2012 near their respective 52-week highs. An upside break appears to be in the works, as the banking industry continues to assume less risky businesses, while shoring up their balance sheets and producing stronger units.
The subprime credit crisis that surfaced in 2008 and drove the U.S. and the global economy into a recession was not what we wanted to see. But in some sort of twisted way, the events have led to an industry that has restructured the way banks do business, specifically the amount of risk that is assumed by a bank via sophisticated strategies. So far, the change coined the “Volcker Rule,” set in place by economist and ex-Fed Chairman Paul Volcker, appears to be capping the speculative trades made by the banks, which is good.
Banks have altered the way they do business and have shown positive strides along the way.
In my view, the operating results have been fairly good, and they indicate that the banks are able to grow their business volume across the board during the economic recovery in the U.S.
Moreover, with the housing market and economy continuing to improve, I feel bank stocks will also to gain altitude. (For more on the housing market, read “Why the Housing Market Is Promising but Overextended.”)
The majority of the big banks have paid back part or all of their government loans. Bank stocks are showing promise and delivering better results.
The bank stocks risk has declined, but there are still issues that could hamper the ability of bank stocks to deliver. According to Trepp, about one out of every eight bank stocks failed the stress test. (Source: “Trepp Releases Groundbreaking Capital Adequacy Stress Test Report: 1 in 8 Banks at Risk,” Trepp, October 10, 2012, last accessed January 4, 2013.)
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 Moody’s Investor Services’ downgrade of the sector. The group has since staged a rally back above the 50- and 200-day moving averages (MAs). There’s near-term topping on the charts, but a strong break could see more gains this year.
Chart courtesy of www.StockCharts.com
The Federal Reserve annual stress test in March 2012 showed 15 of the 19 U.S. big bank stocks passed the stress test, compared to 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).
According to Moody’s, the banks with the highest risk are Bank of America Corporation (NYSE/BAC), Citigroup, Morgan Stanley (NYSE/MS), and The Royal Bank of Scotland Group plc (NYSE/RBS). The concern expressed is that some of the bank stocks are vulnerable to risk in the global financial markets. We are talking about the U.S. banks’ holdings in European banks and the excess trading risk assumed in trying to make profits for shareholders.
The second-riskiest group of bank stocks is comprised of The Goldman Sachs Group, Inc. (NYSE/GS), Deutsche Bank Aktiengesellschaft (NYSE/DB), and Credit Suisse Group AG (NYSE/CS).
And according to Moody’s, the most stable bank stocks include JPMorgan Chase & Co. (NYSE/JPM), HSBC Holdings plc (NYSE/HBC), and Royal Bank of Canada (NYSE/RY). Canadian banks are quite strong and trade on the New York Stock Exchange (NYSE).
The bottom line is: in spite of the risk that still exists in the bank group, the climate for bank stocks is much better and worthy of a look. I see bigger gains ahead of us.