With recent news that the Basel III regulatory requirements on banks are being temporarily "loosened" to spur economic growth it's time to answer the question "is now the time and place to be investing in bank stocks again?"
In my opinion, the simple answer is "Yes" given certain conditions are met.
Here are four of conditions that I think need to be met in order to seriously consider any bank stock in the right now:
- The bank needs to pay investors a dividend. The banking sector has a long history of offering investors a nice dividend yield and it isn't 2008 anymore. As well, if a dividend isn't being offered this could indicate management isn't sufficiently confident with its asset base or liquidity position as of right now. I've always believed that with additional risk should come additional compensation.
- Proof is in the pudding when it comes to banking. If a bank says it's doing well then the numbers on the financial statements need to prove it. No amount of smooth talking from a bank CEO on an earnings conference call will ever quantifiably reduce the beta on an investor's portfolio.
- Bigger is better when it comes to the banking sector. The 2008 Financial Crisis made that clear in my opinion. Governments all around the world were willing to assist certain major banks because of the global systemic risk they posed while letting smaller names whither at the vine or collapse. If favoritism or some form of nepotism is being played "unofficially" then keep it simple and play by the same "unofficial" rules that everyone else follows.
- Some banking analysts have become bullish on the banking sector as a whole due to the Basel III updates but I'm not completely onboard with this thought process. While the temporarily toned down Basel III requirements will likely help banks that won't change the fact that banks remain highly correlated to the fundamentals of the global economy. The global fundamentals remain restrained for the current period. Therefore, at this time I think it's better to go for best-in-breed when it comes to the banking sector instead of taking a wholesale buying approach.
Normally I don't lower my 3% dividend yield requirement but for banking I made an exception and I lowered to 1% for two reasons:
- The ability and "spirit" of providing a dividend in the first place offers sufficient intrinsic value for the time being given the sustained plight of the banking sector.
- Down the line should the dividend be boosted market participants will likely read this act as a bullish sign by management and drive the stock price higher. A boosted dividend plus a higher stock price in the future is an easy win-win situation to understand.
When trying to narrow down the list of large-cap dividend-paying bank stocks that are worth researching I started by avoiding names that trade with a huge valuation premium (Forward PE=<15). Then, cut down the list further by focusing on names that are proving that they're actually doing better by posting solid top line growth (Year-1 over Year-2 Revenue Growth=>10). Finally, focus on banks that are taking advantage of the very accommodative global monetary policy and providing their investors with respectable returns relative to their profitability (ROE>=7%).
Below you will find six bank stocks that meet all of the criteria referenced above, which are listed from largest to smallest by market capitalization:
Rev. Growth (Y1/Y2)
Op. Inc. Growth (Y1/Y2)
Royal Bank of Canada (RY)
Westpac Banking Corp. (WBK)
Toronto Dominion Bank (TD)
Bank of Nova Scotia (BNS)
US Bancorp (USB)
Deutsche Bank AG (DB)
*Information sourced from Morningstar.com
Banks stocks may not be the talk of the town right now but often it pays to go against the grain so this could be an interesting sector for 2013. I hope dividend investors enjoy and find this list of large-cap dividend-paying bank stocks useful as they do their own due diligence for 2013.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.