Since the financial crisis in 2008 the financial sector has faced an challenging conditions with low market interest rates and weaker consumer demand for loans. In 2012, economic conditions began to improve and most financial companies benefitted directly. Declining rates of unemployment and record low interest rates have increased demand for mortgages and loans, creating increased revenues at financial firms nationwide. Despite the strong uncertainty that remains in the financial sector, the industry strongly outperformed the S&P 500 in 2012, and is off to a strong 2013. With many companies experiencing increased revenues and economic conditions slowly improving, the financial sector will continue to perform well in 2013.
Wells Fargo (NYSE:WFC) is a commercial bank that focuses on taking in consumer deposits and issuing loans, mortgages, and credit cards to earn revenue. In 2012 they originated over a third of all mortgages in the country, benefiting strongly from low interest rates and high volumes of consumer refinancing. During the fourth quarter 72% of mortgage applications were refinances. Most consumers have already taken advantage of the low rates which will cause refinancing to decrease, lowering fee revenue. The Federal Reserve's plan to keep interest rates down until the unemployment rate reaches 6.5% will keep net interest margins at the bank low for the foreseeable future. If trends of increased bank deposits continue in 2013, less fee revenue accompanied with low interest margin will slow the growth in bank's earnings.
Though Wells Fargo will be greatly impacted by low rates in 2013, management has positioned the bank well for long term growth. Though they have historically kept a much simpler business model than other large banks such as Citigroup (NYSE:C) and Bank of America (NYSE:BAC), increased expansion looks to be on the agenda. Wells Fargo's purchase of Wachovia in 2008 made them the largest deposit gatherer in many large markets, and when interest rates rise, they will benefit severely.
Wells Fargo is positioned well for long term revenue growth as interest rates rise, but earnings may face pressure till the Fed decides to do so. With the bank selling at a premium to book value (1.26), it can be seen as a relatively low risk stock that may provide decent returns. However, with many financial institutions still selling far below book value, I would recommend investing elsewhere.
National Bank of Greece (NBG) provides a variety of financial service activities in Greece, a nation that has been in a deep recession since 2008. The bank has suffered severe losses because of the difficult economic conditions but is finally seeing glimpses of a turnout. Recent debt buybacks have been successful in the nation and the European Central Bank has reopened its window for collaterals from Greek Banks. Strong austerity reform has been taken as the country expects to post a primary budget surplus in 2013 (doesn't include interest on debt).
Bank of Greece, an ADR, is trading at $1.60 per share as of 2/1/2012, $.48 above historic low and $.32 below its 200 day moving average. The bank is one of four in the nation taking part of a recapitalization process that will be completed by April. The announcement that around 10% of the funds must come from the issuance of common stock has likely been the cause of a recent decline in stock price, as investors expect dilution. Recapitalization, cheaper access to funding, and increased capital levels will allow the bank to begin issuing more loans as the country looks to begin growing its economy. Huge cuts in expenses have created a healthier balance sheet for the bank, though losses on delinquent loans are sure to continue. Bank of Greece is the nation's biggest lender, and is in talks to purchase rival Eurobank Ergesias, which would increase their dominance. With economic recovery on the horizon in Greece, and already taking place in other parts of Europe, National Bank of Greece will look to increase earnings and provide investors the opportunity for a huge return.
Disclosure: I am long NBG.