As 2013 has gotten off to a great start, the economic news continues to be mildly bullish and it may be time for investors to fall back in love with the financial sector. It has been the "evil child" of the stock market for the last four years, but as we climb out of our economic slump, good things are happening for the banks. The Financial Sector SPDR (XLF) has been on a 2 month climb along with most of its financial stocks and it appears that favorable days still lay ahead for big banks.
There are three things the financial sector needs to see for it to continue to grow:
- Strong Economic Growth
- Higher Asset Quality
- More Liquidity to Increase Business
From all observations, it does appear that 2013 looks good as the economy continues to grow. One of the best indicators to confirm this is investments in residential housing. This includes investments in new construction of permanent-site single-family and multi-family units, improvement to housing units, or buying manufactured homes.
People are buying houses again. In a region of rural Massachusetts 30 miles south west of Boston, all the surrounding towns recorded an increase in housing sales in 2012. In October, home sales in the U.S. rose 11% over the previous year. In November, home sales rose 15.3% over 2011. The slow (but steady) increase in jobs and low interest rates are attracting people to real estate again and this is a sign of economic growth that in turn helps big banks grow in value.
High quality assets generally have stable cash flow patterns with steady positive growth and one example we can all understand is the quality of mortgage loans. As the industry continues to rid itself of poor assets and adds better quality, the value of the stock will continue to rise. Recently, NewBridge Bancorp (NBBC) stated how they accelerated the disposition of problem assets and increased mortgage revenue in the fourth quarter by 53%. This month JP Morgan (JPM) announced how its fourth quarter profits rose more than 50% as they beat analyst expectations and attributed much of that growth to mortgage revenue that more than doubled. At the same time, they set aside less as the lender for future losses.
With a better economy comes more liquidity for the banks. Saving accounts are one example of liquid accounts. As the economy grows, bank deposits start to grow and this provides money for the banks to lend. The combination of deposit growth and strong lending leads to better earnings for the banks. JPMorgan also announced Commercial Banking loans growing for the tenth straight quarter, rising 14%. Among large banks and small banks, most are reporting increased deposits this quarter. Earlier this week, a smaller regional bank Metro Bancorp (METR) announced that for 2012 they have a loan growth of 6% and a deposit growth of 8% (year over year).
This may be the perfect time to fall in love with bank stocks again. Dick Bove believes big bank stocks will grow quite a bit in 2013. His expectations include 30% for Citigroup (C), Morgan Stanley (MS) 21%, and Goldman Sachs (GS) will appreciate 19%, just to name a few.
I know the whole financial sector has been strong for the last 6 weeks, but it should be even stronger this year. With a growing economy and lower unemployment, banks will continue to accumulate better assets than they have had in the last 4 years. Increased deposits will continue to lead to increased commercial lending and loan growth. If you are not in the financial sector yet, it may be time for you as an investor to take a look at some of these banks for your 2013 portfolio.