U.S. Banking Sector Looks Relatively Attractive Compared To European And Japanese Banks

Includes: BAC, C, EUFN, IYF, JPM, XLF
by: Disruptive Investor

The banking sector in the developed markets has been struggling since the financial crisis. The current Sovereign debt crisis in the eurozone has only deepened the woes for the banking sector. The US banking sector is also not completely immune from the problems in the European banking sector due to derivatives linkages.

However, on a relative basis, the US banking sector looks very attractive on several fronts when compared to European banks. Therefore, if I had to consider exposure to banking stocks in the advanced economies, I would prefer going long on US banking stocks.

Discussed below are some of the major reasons for considering the US banking sector as a better investment option.

The first chart gives the loan-to-deposit ratio for US, EU and Japanese banks (Source: BIS Annual Report 2011/12).

Loan-to-deposit Ratio for US, EU and Japanese Banks

As evident from the chart, the loan-to-deposit ratio for US banks has been on a decline after the financial crisis. However, the ratio remains high for European banks and has ticked up marginally for Japanese banks in 2011 when compared to 2010. With wholesale funding drying up, the LTRO's have been the lifeline for European banks. US banks are currently in a more comfortable position.

The second chart gives the stable funding ratio for US, EU and Japanese banks (Source: BIS Annual Report 2011/12).

Stable funding ratio for US,EU and Japanese Banking Sector

The stable funding ratio is the best for banks in the US and worst for European banks by a clear margin. A low stable funding ratio indicates high maturity transformation for European Banks, which is associated with liquidity crisis for banks.

The third chart gives the capital ratios (%) for US, EU and Japanese banks (Source: BIS Annual Report 2011/12).

Capital Ratios for EU, US and Japanese Banks

The capital ratio for US banks is the strongest when compared with EU and Japanese banks.

The final chart, which gives the CDS premia for EU, North American and Asian banks, is an indicator of the perceived creditworthiness of banks.

CDS Premia for EU, US and Asian Banks

Clearly, a very high CDS premia for EU banks indicates that the perceived creditworthiness is the lowest for EU banks when compared to Asian and North American banks.

Very clearly, some of the key banking ratios and indicators point to the conclusion that the US banking sector is far more comfortably placed than the European banking sector.

The long-term future of the banking sector is uncertain in terms of structural changes in the system. However, any meaningful correction in markets and the financial sector can be used as an opportunity to consider exposure to some US banking stocks for a medium-term trade.

In my opinion, another round of correction in the markets and financial sector in the second half of 2012 might make JPMorgan Chase & Co. (NYSE:JPM) an attractive medium-term buy. The stock has a healthy dividend yield of 3.4% when compared to Bank of America Corporation (NYSE:BAC) with a dividend yield of 0.5% and Citigroup Inc. (NYSE:C) with a dividend yield of 0.1%.

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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