Stay Away From The Big Banks

Includes: BAC, BK, C, GS
by: Matt Schilling

I wanted to examine a few things associated with four of the biggest US banks. The results of the CCAR are in, and some folks think they don't mean much. However, I disagree. Bank of America [NYSE: BAC] has virtually shrugged off the accusations it was at fault during the US mortgage crisis. Goldman Sachs [NYSE: GS] has recently been cited as calling its clients 'Muppets'. Bank of New York Mellon Corp. [NYSE: BK] is named in a law suit by the North Carolina's Treasurers office, citing a $70 million bad investment. Citigroup [NYSE: C] has just failed the CCAR miserably.

This is not the best time to start pouring your money into these financial institutions. Why? I'm a big believer in investor confidence. I like companies that reward their shareholders for sticking through the good times and the bad times, but these banks don't care about the long-term investor, or the individual investor. Let's examine them a little more closely.

Bank of America

Here's a bank that's been notoriously associated with misleading customers. Never a good thing, when you're dealing with mortgages and retirement plans. Most recently, it has been cited in Florida as one of the most complained-about financial institutions, and a ruling in Nevada regarding property foreclosures will most likely result in an unfavorable decision. It currently has a P/E ratio of 955 and a yield of 0.50%. March 2012 earnings estimates don't carry much attraction either. Analysts are all over the place with a low-end estimate of -$0.06/share and a high-end estimate of $0.20/share.

Goldman Sachs

Once a darling amongst high net worth clients, recent scandals have diminished the value and reputation of the bank. Most notably the exit and open ended New York Times Op-Ed letter by Greg Smith. The letter cited Goldman as referring to some of its clients as 'Muppets'. The company has a fairly attractive P/E ratio at around 27; however, no one really knows how Greg Smith's fallout will affect the company moving forward. Analysts are again all over the place with estimates, with a low-end estimate of $1.80/share and a high-end estimate of $3.04/share. That's way too big of spread for any investor.

Bank of New York Mellon Corp.

Two lawsuits that are currently pending, question the integrity of Bank of New York. The first is a suit brought against them by the North Carolina's Treasurer regarding a $70 million dollar bad investment. The second, and probably most notable, is a lawsuit citing the submission of forged mortgage documents in the MERS (Mortgage Electronic Registration System). Even though it has the most attractive yield (2.2%) of the companies I've featured, a recent earnings miss raises a red flag. The Q4 estimates had called for $0.53/share, but BK had announced a dismal $0.42/share.


Citigroup should be ashamed of itself for failing the CCAR; instead its CEO came out and said Citigroup will try harder. I'm sorry, but if I'm an investor, I'd pull my money out and put it under my mattress. Fallout for Citigroup could happen in two stages. The first stage is the $25 Billion foreclosure settlement agreement brought by the US Department of Justice, and the second stage would be disappointing earnings. The latter will certainly ruffle the feathers of investors. Q4 earnings fell short (estimates called for $0.49/share and Citigroup reported $0.31/share) and Q1 earnings don't look any better. Investors need to be very cautious on Citigroup.

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

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