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Investing in bank stocks – finally a light at the end of the tunnel?

Investors in banking stocks such as Citibank, UBS and many others certainly have had a hard time in recent years. Many stocks have fallen by 60 percent or more and investors lost a lot of money. The financial sector has also been the weakest market sector in the past few years. Given the very disappointing performance of such stocks, it is not surprising that the broader market indices have not been able to make any meaningful advance in the past few years, keep in mind that the Dow today still stands at pretty much the same level we had ten years ago. The banking sector has been without doubt heavily leveraged in the past and the recent financial crisis has shown how quickly liquidity problems can spread when most major banks are undercapitalized and therefore overleveraged. It remains to be seen whether the recent regulatory changes, which will make it necessary for banks to hold more capital, are sufficient. What is certain is that troubled and undercapitalized banks will need to increase capital significantly, either by holding back profits and/or by selling new shares. 
But are there any interesting investment opportunities or are all banks bad investments? While we remain sceptical for many large banking organizations and would not consider making any investments there, we are starting to see some real opportunities in the sector. We like banks that have been relatively conservative in the past and have therefore weathered the storm of the financial crisis relatively well and without any bailout programs. At the same time, a bank has to have growth opportunities such as emerging markets and the capital necessary to fund such expansions. That is why we like certain banks in Canada and Australia that have healthy balance sheets, attractive dividends, moderate valuations and significant potential to grow their businesses in the years to come, especially through their activities in emerging markets.