Big Banks Are Planning A Comeback

A number of large American banks are finally going to start charging new fees, such as a $5 per month fee for debit card users. I know that many consumers feel they are entitled to free banking services, free checking, free checks, etc., but none of this stuff is really free and it's about time that the banks stood up and started charging for all these services that they used to be able to give away for free.

Thanks to massive regulations from Washington, with bills like the Frank-Dodd Act (see that here) as well as lawsuits against the banks, mortgage losses, etc., it is simply no longer possible for banks to give away so many services. I believe this is one of many steps that banks are making in order to make a comeback and turn things around so that the financial system is once again healthy, solidly profitable and able to start hiring thousands of Americans. The banks have been targets for many politicians and others, but attacking banks is just an attack on regular people who lose money as shareholders in these stocks, and in some cases lose their jobs.

A new article by Daniel Gross explains that banks need the new fees, in part, to make up for new regulations imposed by Washington. The article states:

In some ways, the imposition of fees is a positive development. The concept of charging customers for a service is actually a more sustainable and intelligent way for banks to do business. In the boom years, banks took deposits, borrowed lots more in the capital markets, and then lent that money recklessly to homebuyers, companies, hedge funds and other banks. No questions asked. The truly huge banks like Bank of America and Citi used a chunk of their assets to start internal hedge funds and proprietary trading operations. During the housing-and-credit bubble, all this activity spun nice profits. And that meant banks could give away services like checking and ATM use. But in 2008 and 2009, all those profits turned into losses — for shareholders and for taxpayers. And it has become that the nation needs a much more boring banking system.

It's time for the banks to charge for their services. A strong banking system that is highly profitable is great for the economy and for job growth. Once the European debt crisis is resolved, it looks like the very beginning of a comeback for banks will already be in place.

Here are some bank stocks that could rebound the most:

Bank of America (BAC) has been hard hit by a near perfect storm of events, including new regulations, lawsuits, a difficult acquisition of mortgage lender Countrywide, and more. However, BofA has been making tough choices and has taken steps for a turnaround, including raising capital and announcing new fees to boost profits. If the bank took further steps to isolate mortgage losses, the stock could really surge. A recent Bloomberg article on Bank of America raises the possibility that BofA could allow its Countrywide subsidiary to file for bankruptcy in order to get out of the mortgage liabilities that have been plaguing the bank. The article states:

Bank of America Corp. (BAC), the lender burdened by its Countrywide Financial Corp. takeover, would consider putting the unit into bankruptcy if litigation losses threaten to cripple the parent, said four people with knowledge of the firm’s strategy. The option of seeking court protection exists because the Charlotte, North Carolina-based bank maintained a separate legal identity for the subprime lender after the 2008 acquisition, said the people, who declined to be identified because the plans are private.

Here are some key points for BAC:

• Current share price: $6.12
• The 52 week range is $6 to $15.31
• Earnings estimates for 2011: loss of 30 cents per share
• Earnings estimates for 2012: profit of $1.23 per share
• Annual dividend: 4 cents per share which yields .6%

Citigroup, Inc. (C) is a banking and financial services giant. Almost every financial stock has been in decline and Citigroup is no different. With so many negative headlines against banks, it might pay to watch this stock for signs of a bottom before buying. Citigroup has exposure to high potential growth areas such as emerging market countries and it has less liability with mortgage issues in comparison to other banks. Once the European debt crisis is resolved, I think this stock will be able to move higher.

Here are some key points for C:

• Current share price: $25.61
• The 52 week range is $23.19 to $51.50
• Earnings estimates for 2011: $3.91 per share
• Earnings estimates for 2012: $4.85 per share
• Annual dividend: 4 cents per share which yields .2%

Financial Select Sector (XLF) is a ETF with diversified stock holdings in many large banks and financial stocks. This ETF holds stocks like JP Morgan, BofA, Citigroup, Wells Fargo (WFC) and others. This is the safest way to play a comeback in the banking sector due to the diversification it offers.

Here are some key points for XLF:

• Current share price: $11.81
• The 52 week range is $11.34 to $17.20
• Earnings estimates for 2011: n/a
• Earnings estimates for 2012: n/a

JP Morgan Chase (JPM) is one of the best managed and largest banks in the United States. JPM is one of the best managed banks in the market and at less than 8 times 2012 earnings and below book value, it could bounce back quickly.

Here are some key points for JPM:

• Current share price: $30.12
• The 52 week range is $28.53 to $48.36
• Earnings estimates for 2011: $4.71 per share
• Earnings estimates for 2012: $5.31 per share
• Annual dividend: $1 per share which yields 3.3%

Data is sourced from Yahoo Finance. No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.

Disclosure: I am long BAC.