As the markets continue to rise, the financial sector (XLF) likes to lead these bullish runs, especially when the economy is getting better. As the year unfolds, there are some banks that look like good investments and others that may not be a financial investor's first choice right now. Let's take a look at what is happening in the sector.
It was a good year for banks in 2012. U.S. banks reported near-record earnings of $141.3 billion that was within a few billion of the record set in 2006. With interest income tightening margins, 6 out of 10 banks still record increases. Contributing to this was the large reduction needed to set aside for bad loans. That amount dropped by 24.7% (year over year). Troubled loans have not gone away and are still an issue but not having to set aside so much money has really helped the bottom line. Commercial loans have increased and deposit growth is also increasing, making the sector very attractive indeed.
Goodbye to Default Labor
JP Morgan (JPM) will be cutting 17,000 jobs over the next two years. Even though both consumer and mortgage sides will be taking the hit, the mortgage side will take most of it with layoffs between 13,000- 15,000. Is this a sign of something bad? I am not sure of that. With the housing market continuing to improve, there are fewer defaults to handle and this is a good thing! Foreclosed properties that are owned by lenders have seen an increase in value by 2% from the third quarter and a 4% gain (Y o Y) from 2011. Short sales also were healthy and this is a good sign for longer-term housing markets. Short sales (short of the loan amount) were also better by 7%. All this leads to a better housing market and economy. JPM is not the only large bank benefiting from this. Bank of America (BAC) is also going to be cutting its "default" labor as the housing market improves even though its default business is still a bit excessive. Mortgage defaults are coming down, so the market is adjusting. A better housing market also means a better economy and more jobs elsewhere.
Goldman Sachs (GS) Coming on Strong
With the stock soaring lately, the fourth-quarter numbers have shown how the company has turned itself around and how it is a long way from the near bankrupt company of 2008. Look at these fourth-quarter numbers:
- EPS of the firm stood at $5.60, which was far higher than the average analysts' estimate of $3.66.
- Revenues for the fourth quarter stood at $9.24 billion, which was also much higher than estimates of $7.83 billion.
- Mortgage banking had a net income of $418 million, which was a big jump from the previous quarter's loss of $269 million.
Is JPMorgan the Best Bank Buy?
With inexpensive forward earning estimates, and company projections pointing to better profits for investors, I am wondering if JP Morgan should be one of the bank stocks investors should take note of. The company is presently trading at about 8x its 2014 earnings estimates and only two other banks have better multiples. What does this mean? Well, let's compare Bank of America with JP Morgan. Bank of America is trading at about 8.7x earnings, a little more than JPM, but it is still working through its mortgage mess and will continue longer than JPM. So it is possible that for the next few years, JP Morgan may produce better earnings results than BAC.
Wells Fargo (WFC) May be a "Wait and See" Stock
Presently under investigation by the Consumer Protection Financial Bureau, the Bureau is examining the bank's mortgage origination and compliance management and possibly mortgage servicing if the probe is expanded. The company recently announced faulty mortgages could cost the bank $2.4 billion beyond it s reserves. This is a $300 million increase (Y o Y). Wells Fargo previously said it set aside $1.67 billion in reserves last year to cover the cost of buying back mortgages from investors. Even though this is a worst-case-scenario, it still does not make investing in Wells Fargo attractive by any means.