Banks on Better Footing

Banks have steadily recovered since the Lehman Brothers collapse in late 2008 sent the bank sector in a downward spiral that inevitably required hundreds of billions of bailout infusion from Uncle Sam to save the U.S. bank sector.

In my view, this chaotic event was an opportunity that only appears once in a while. It was clear in my mind that the U.S. government could not afford to let the major banks fail, as this would have likely triggered a mass selloff in the U.S. For example, there was absolutely no way the government would allow the Bank of America Corporation (NYSE/BAC) or Citigroup, Inc. (NYSE/C) to fail, as it would drive down banking competition nationwide and this would not be good for competition and or confidence in the U.S. bank sector.

Chaos always provides opportunity to make some fairly easy money. On March 5, 2009, you could have purchased Citigroup for $1.02. The stock recently traded at $5.15. A purchase of 100,000 shares could have made you a cool $413,000 in less than two years! This is the kind of opportunistic buying that sometimes presents itself. It will happen again; maybe not in banking but in some sector. You just need to be alert and watchful.

I continue to like the progress of the big banks, but remain concerned with some of the bad stuff on the balance sheets and the government’s new restrictions on banking activities.

The Volcker Rule proposed by economist and ex-Fed Chairman Paul Volcker to restrict some speculative activities will hurt profits, but it will also strengthen the banks and prevent the mess like the one we’ve already witnessed. Trust me; knowing the banks, they will find ways to get around this.

The progress of banks is evident early on in the fourth-quarter earnings season.

JP Morgan Chase & Co. (NYSE/JPM) beat on earnings per share (EPS) estimates by six-percent revenue growth.

Citigroup failed to meet EPS estimates and fell short on revenues. The stock had surged to above $5.10 on heightened expectation after the strong report from JPM. Overall, the results were a steady improvement year-over-year, which is what you want to see.

The Bank of New York Mellon Corporation (NYSE/BK) and U.S. Bancorp (NYSE/USB) both reported strong revenues, but mixed earnings.

The Goldman Sachs Group, Inc. (NYSE/GS) reported a 52% year-over-year decline in EPS, but it was in line with estimates. Clearly, this is great timing for those principal Goldman employees who received billions of dollars in bonuses prior to the fourth-quarter report!

The results from the banks, while improved from a year earlier, continued to show some fragility in some areas, enough to drive traders to take some profits off the table.

There is speculation that banks will be able to begin to again pay out dividends sometime this year, which will attract institutional and retail investors.

I view pullbacks as an opportunity to accumulate shares, as I remain longer-term positive on the big banks.