Big Banks Near Buy Levels, Thanks To Dodd-Frank

|
Includes: BAC, CS, DB, GS, JPM, SCGLY
by: Dana Blankenhorn

Summary

Banks are under new stress in 2016.

Federal regulations put in place after the 2008 crash let them survive that stress.

They're becoming bargains, although maybe not just yet.

The biggest U.S. banks have been getting pounded this year, as investors wake up to write-offs that have to come in oil, tech, and international lending.

I find that hard to argue with. Goldman Sachs (NYSE:GS) looks a lot more reasonable, given current risks, at $140 than it did at over $200. JP Morgan Chase (NYSE:JPM) looks a lot better with a Price/Earnings multiple below 9. Even some experienced bears are starting to consider Bank of America (NYSE:BAC) a bargain after losing 31% of its value since the start of the year. I'm not going in yet, but I'm starting to get interested.

That's because this is not 2008. Stress tests and higher capital requirements, which the industry has been screaming about since they were enacted, and sending lobbyists to water down, make this an investable sector. Even now.

Take a look at Bank of America for example. They have $2.144 trillion in assets as of December. But their leverage is less than it was in 2007, they have more cash to cover losses than before, and they have been passing the Fed's stress tests, which means they're ready for just about anything the market can throw at them.

Compare that with some of the big European banks, like Deutsche Bank (NYSE:DB), Credit Suisse (NYSE:CS) or Societe Generale (OTCPK:SCGLY). Those stocks have all been suffering this year, in some cases better than their New York counterparts, in some cases worse. But there's no floor underneath them. Their books are black boxes, their ability to withstand losses is untested. Worse, since their collateral is now in securities that can carry a negative interest rate, their own credit-worthiness is being watered down.

The regulations put in place after the 2008 crisis, like Dodd-Frank, and the stress tests, assure investors that the biggest banks can withstand the present turmoil. It does not mean they won't suffer in the gales, but it does give a real assurance they won't topple over.

This is what banking is supposed to be about. Banks are meant to be a bulwark against hard times, flinty-eyed skeptics who eye loans carefully, who give credit grudgingly, who demand payment regularly but who take bets on a growing economy and, in general, make money. (It's important to note that all the big money center banks were still making a profit as 2015 closed.)

Banks are not supposed to be run by speculators who are taking depositors' money to the dog track. Let the hedge funds take that business, and let those who invest in guys like Bill Ackman take care while doing so, because with big gains can come big risks.

Bankers ignored this in the last decade. They thought they could insure against risk. You can't. So while I'm not suggesting you should buy, buy, buy the big banks at these levels, I am saying that buying levels will be reached, and those who hold these stocks across the chasm will be rewarded, because they're on a ship built to withstand a hurricane.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.