Investing in the financial sector in 2012 would have brought incredible returns! As we journey through 2013 it is highly unlikely that this sector will duplicate what it did last year. Some of the big-name banks that have struggled so much through the financial crisis and rebounded in 2012 are doing well this year, but some are not growing as fast as others. Let's take a look at how two banks in particular are performing and how investors should approach them this year. The two banks I am talking about are Citigroup and Bank of America.
Influence of the Housing Recovery
As housing prices continue to rise big banks like Citigroup (C) may be the greatest beneficiaries. The rising home prices according to some analysts could be the biggest upside for Citi's earnings even though mortgage loans account for less than 7% of its assets. Companies like Wells Fargo (WFC) have a much bigger piece of the pie with 23% of its total assets making up mortgage loans. Even though the bank has scaled back its mortgage operations since the financial crisis started five years ago, it still has roughly $80 billion in troubled mortgage assets which it has been slowly trying to shed through sales and runoffs. Sales have slowed and the bank is not willing to do bulk sales at discount prices and the upturn in the housing market seems to have worked within its favor.
The housing recovery can be a fickle revenue stream for banks. Credit costs are expected to decline sharply and legacy assets will improve. But things like mortgage origination revenue will be under pressure because competition will grow for pricing as the volume in refinancing slows down. Banks with troubled mortgages like Citibank and Bank of America (BAC) will benefit the greatest from rising housing prices and banks like Wells Fargo credit and serving costs are relatively low won't. Citibank has the most to gain from lower charge-offs and servicing expenses and would also be the least affected by a decline in mortgage banking fees according to some analysts.
Corporate America Earnings and Financial Stock
It is amazing how well corporate America has done in its pursuit to keep profits growing even though revenue growth has been running up against the wall the last couple quarters. These margins will have to be sustainable if the financial sector, especially banks, are going to continue to grow and be profitable. Some think margins will inevitably have to revert back to their mean but some believe that margins for corporate America could continue to rise.
Margins for corporate America (outside of the tech sector) have been higher, even before the struggle from 2008 through 2009 and because of this the potential for upside in the S&P 500 sectors still has opportunity. While common sense would tell anyone that corporations cannot continue just to push out profits in this environment, some analysts do not believe that the environment is that dire yet. If this is true, the banking industry should be able to remain profitable for a while.
Citibank from an Investors Perspective
As an investor, if I am looking at Citibank I have to have some hesitation knowing that shareholders have been calling for a bank breakup. I believe a lot will rest upon how the price of the stock performs over the next year. I guess as an investor I would search for the answer to a bank breakup. What would have to happen for management to consider breaking itself up?
Some analysts believe that Citigroup would trade higher in parts than it would together and consider the bank undervalued. Management appears to be trying to move the bank in the right direction but it has a poor track record of execution. In terms of performance, the bank has done quite well this year! But the stock remains far below its "pre-crisis" level because of things like poor resource allocation oversight and management. The annual meeting appears to be a success for management. Even though the stock looks really inexpensive, an investor needs to take into account the bank's long-term performance, because this is where things really hit the road.
Bank of America from an Investor's Perspective
While it is important for investors to consider past history of Citibank before they invest, another bank with as much dubious baggage that needs past considerations is Bank of America. Share prices of the bank doubled in 2012 when it barely treaded water at $5.80 at the beginning of the year. At the end of the year it was trading at $11.61. It was great for those who bought into the stock early and as the stock trades above $12 at present, can we expect it to proceed much higher in the long run?
It seems 2012 was a turning point for the financial industry because Bank of America is not the only big banks that did well. All the big banks including names that you recognize like Citigroup and Wells Fargo grew on average over 39% for the year and became the best performing sector in the S&P 500. This would lead me to believe that the banks as a whole have turned around and are on a long term bullish trend looking for their glory days again. But 2012 was a big year for a really downtrodden sector and duplicating a year like that doesn't look likely, especially for BAC.
I point out BAC because its growth this year is less than half of the other banks that I have mentioned in this article. Bank of America is a long term investment for people that will be patient. It continues to struggle, sometimes appearing unfocused with leadership trying to figure out which way to go. After a good 2012, investors appear to be choosing banks that seemed more focus and stable.
Both of these banks have challenges ahead, and even though Citigroup leads all banks in value growth this year (above 13%), it still has a delicate history that needs to be considered and if it doesn't perform well down the road there is a chance that a dialogue of breakup could occur. Bank of America needs to wrestle through a vision for itself and convince investors it knows where its going. It does not have the best reputation among large banks right now and needs to put together a good track record that shows customers believe in the bank again. These are considerations investors should ponder as they research both these bank stocks for investments.