Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Why Most Investors LOST Money by Investing in ARK FUNDS - 27th Jan 22
The “play-to-earn” trend taking the crypto world by storm - 27th Jan 22
Quantum AI Stocks Investing Priority - 26th Jan 22
Is Everyone Going To Be Right About This Stocks Bear Market?- 26th Jan 22
Stock Market Glass Half Empty or Half Full? - 26th Jan 22
Stock Market Quoted As Saying 'The Reports Of My Demise Are Greatly Exaggerated' - 26th Jan 22
The Synthetic Dividend Option To Generate Profits - 26th Jan 22
The Beginner's Guide to Credit Repair - 26th Jan 22
AI Tech Stocks State Going into the CRASH and Capitalising on the Metaverse - 25th Jan 22
Stock Market Relief Rally, Maybe? - 25th Jan 22
Why Gold’s Latest Rally Is Nothing to Get Excited About - 25th Jan 22
Gold Slides and Rebounds in 2022 - 25th Jan 22
Gold; a stellar picture - 25th Jan 22
CATHY WOOD ARK GARBAGE ARK Funds Heading for 90% STOCK CRASH! - 22nd Jan 22
Gold Is the Belle of the Ball. Will Its Dance Turn Bearish? - 22nd Jan 22
Best Neighborhoods to Buy Real Estate in San Diego - 22nd Jan 22
Stock Market January PANIC AI Tech Stocks Buying Opp - Trend Forecast 2022 - 21st Jan 21
How to Get Rich in the MetaVerse - 20th Jan 21
Should you Buy Payment Disruptor Stocks in 2022? - 20th Jan 21
2022 the Year of Smart devices, Electric Vehicles, and AI Startups - 20th Jan 21
Oil Markets More Animated by Geopolitics, Supply, and Demand - 20th Jan 21
Fake It Till You Make It: Will Silver’s Motto Work on Gold? - 19th Jan 22
Crude Oil Smashing Stocks - 19th Jan 22
US Stagflation: The Global Risk of 2022 - 19th Jan 22
Stock Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Two Bank Stocks to Buy Right Now

Companies / Banking Stocks Mar 18, 2009 - 12:56 PM GMT

By: Money_Morning


Best Financial Markets Analysis ArticleMartin Hutchinson writes: Although we're still in the middle of the worst financial crisis in decades, a few select banks are positioned to make a boatload of profits. And if you pick the right ones, gains of 100% or more are easily within reach.

The U.S. Federal Reserve's actions in cutting short-term interest rates to almost zero - together with a gentle rise in U.S. Treasury bond yields since the start of the year - have given us a steeply sloping yield curve, where long-term rates are about 3% above short-term rates.

What's more, lending rates to corporate and personal borrowers are way up, far more than Treasury bond rates. That means one thing: In their new lending - particularly to small businesses - banks are making money like gangbusters.

At least, some of the banks are…

Let me explain.

The “steeply sloping yield curve” is bond-market jargon for a situation where long-term bond rates are far above short-term money market rates. In this case, the Fed has forced money market rates down to nearly zero, but has had much less effect on long-term bond rates, which have shown a tendency to rise , both because of the escalating budget deficit and because of the possibility of recurrent inflation arising from the Fed's rapid expansion of the money supply .

Since banks generally borrow short-term money - in the form of demand deposits and short-term time deposits - and generally lend medium-term and long-term money, in the form of industrial loans and leases, automobile loans and home mortgages, a steeply sloping yield curve makes the banking business exceptionally profitable. Borrowing short-term at 1% and lending on a prime home mortgage at 5.5% or 6%, often with a “government” guarantee from Fannie Mae ( FNM ) or Freddie Mac ( FRE ), is good business however you look at it, for as long as the steep yield curve lasts.

In addition, the premium that industrial borrowers pay above U.S. Treasury bond rates has sharply widened, so banks can make much more money on their commercial loan and lease business.

That doesn't mean we should all rush out and buy shares in Citigroup Inc. ( C ). For one thing, Citigroup is involved in all sorts of investment banking, and in a variety of trading businesses, most of which are either down sharply due to the recession or that have disappeared altogether. For another, we still don't know how large and how toxic are the assets on Citigroup's balance sheet.

Whereas regional banks have been coping quite well with their impaired-value assets, Citigroup has been forced to get a $300 billion guarantee on its assets from the Fed, and nobody knows if even that will be enough. The bank is now controlled by the government, and may be nationalized entirely.

Even at their nadir of 97 cents last week, Citi's shares are nothing less than a lottery ticket. That ticket would have paid off if you'd bought last week, with a gain of 130% in a week, but neither I nor anyone else can give you accurate odds on whether it will pay off in the weeks to come.

Of the big banks with assets of more than $1 trillion, only one is attractive. Apart from Citigroup, Bank of America Corp. ( BAC ) made two foolish acquisitions in 2008, and is now struggling with the dodgy housing assets of Countrywide Financial Corp . and the huge investment banking problems of Merrill Lynch & Co. Inc. (which is likely to make much less money in a deep recession than it could in a boom).

J.P. Morgan Chase & Co. ( JPM ), similarly, has huge investment banking businesses and large trading businesses; its businesses in consumer and small business lending are relatively modest. And the other two behemoths that now have conventional banking licenses, Morgan Stanley ( MS ) and Goldman Sachs Group Inc. ( GS ), still are primarily investment banks, with almost no consumer and small business banking operations.

Of the trillion-dollar guys, that leaves Wells Fargo & Co. ( WFC ). Wells Fargo needed money in 2008 - it got a $25 billion capital infusion from the Troubled Assets Relief Program (TARP) - because it bought the retail bank Wachovia Corp ., which was struggling with its own problems.

Wachovia was in difficulty because of its foolish top-of-the-market purchase of housing lender Golden West Financial in 2006. However, the combined Wells Fargo/Wachovia unit remains primarily a consumer- and small-business-banking operation, with a huge nationwide branch network and a relatively small investment-banking business. What's more, there are clearly costs that can come out of the merged group because of their overlap.

Wells Fargo Chairman Richard M. Kovacevich has made snotty comments about the “asinine” federal bank stress test, wants to repay the TARP money, and recently cut WFC's dividend by 85% to conserve capital. However, if the combined bank is as profitable as it should be, Kovacevich may well be able to repay TARP and restore the bank's dividend payout surprisingly quickly.

The current dividend yield at 1.5% is nothing to write home about, but at around 85% of tangible net asset value , Wells Fargo is a “Buy” - and don't forget, if and when Kovacevich restores the dividend, that yield will jump to 9.8%.

Once you leave the trillion-dollar guys, there's a big gap - the next-largest banks are The PNC Financial Services Group Inc. ( PNC ) and U.S. Bancorp ( USB ) at around $290 billion. These regional banks are generally more attractive currently - provided that their bad assets are under control and that they operate in an economically attractive part of the country. 

These banks have little or no involvement in investment banking, and those banks that concentrate on mid-market corporate customers and high-quality consumers should have huge current earning capacity - a multiple of that before the meltdown. That will enable them to take care of further nasty surprises in their asset book and leave a lot over for investors.

Of the Top 12 U.S. banks I surveyed in a special Money Morning story a few weeks ago [actually 13, if you include a separate report I did on Fifth Third Bancorp ( FITB )], PNC was among the riskier institutions because of its acquisition of National City Bank - an operation as large as itself and based primarily in troubled Ohio and Michigan.

Bank of New York Mellon Corp. ( BK ) and State Street Corp. ( STT ) are both oriented toward investment institutions and larger corporate and commercial clients, with perhaps less upside potential from the current steep yield curve. Other banks appear to be having more difficulty with their loan portfolios, or - as is the case with Capital One Financial Corp. ( COF ) - are have oriented themselves toward high-risk credit card lending, which may still show further problems.

Thus, my favorite profit play to emanate from this banking-ranking exercise is the Minneapolis-based U.S. Bancorp, which operates in the upper Midwest and Northwest from its home market of Minneapolis all the way through to Seattle, an area with neither huge industrial problems, nor the remnants of a huge housing bubble. USB has also cut its dividend and wants to repay its $6.6 billion TARP funding: U.S. Bancorp Chief Executive Officer Richard K. Davis  has been as rude as Wells Fargo's Kovacevich on that topic, calling it a “giant bait and switch.”

U.S. Bancorp is currently selling at 130% of tangible net asset value, with a current dividend yield of only 1.5%, but a potential yield of 14% if and when Davis manages to repay TARP and restore the dividend.

Remember, too: Banks traditionally sold at 250% to 300% of net asset value. Once their dividends are restored, Wells Fargo and U.S. Bancorp should have every chance of reaching that level again - they will deserve to on the basis of the dividend yield and earnings power alone.

It may take two years - or even three - but a capital gain of 100% or so, on top of a juicy dividend yield, will make it well worth the wait.

[ Editor's Note : When it comes to banking, there's literally no one better than Money Morning Contributing Editor Martin Hutchinson , who brings to the table the kind of high-level expertise that our readers have come to expect. In February 2000, for instance, when he was working as an advisor to the Republic of Macedonia, Hutchinson figured out how to restore the life savings of 800,000 Macedonians who had been stripped of nearly $1 billion by the breakup of Yugoslavia and the Kosovo War.

Experiences such as this have imbued Hutchinson with special insights in such areas as banking, the financial markets and fixed-income investing. Just last month, the financial Web site Seeking Alpha named Hutchinson to its "leader board" because of his quickly developing online following. And, in Money Morning , Hutchinson cut through the controversy about the health of the U.S. banking system, analyzed the Top 12 U.S. banks, and told readers which ones were "Zombies" and which ones were "Gems." The article was one Money Morning 's most popular pieces of the New Year [If you missed the story, please click here to check it out. The report is free of charge].

Fans and followers of Hutchinson's work will soon be able to subscribe to a new product that focuses on income investing that will feature more of his - insights and essays. That should debut in about a month or so.

Hutchinson also writes regularly for our monthly newsletter, The Money Map Report , in which he and other Money Morning colleagues also make investment recommendations for subscribers. To find out more about The Money Map Report - including a special offer that includes The New York Times bestseller, “ Crash Proof ” - please click here . ]

Money Morning/The Money Map Report

©2009 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email:

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in