Big Banks Bounce Back
Big banks don’t have much of a reputation at the moment. Ok, that’s being kind. People HATE big banks – or at least they have since the infamous subprime mortgage loan crisis in late 2008 and early 2009.
More recently, the ongoing global financial crisis has created a whole lot of fear surrounding big banks, as too many of them have been exposed to the escalating debt in Greece, Spain, Italy, Ireland and Portugal.
But that’s Europe. Banks here in the U.S. – much maligned the last few years – are starting to show signs of life. Recently reported third-quarter earnings at big banks such as JP Morgan Chase (NYSE: JPM), Bank of America (NYSE: BAC) and Morgan Stanley (NYSE: MS) all beat analyst estimates. Many of their reported earnings were higher than the same quarter a year ago. What’s more, most U.S. banks insist that their exposure to the escalating European debt is minimal.
As a result, bank stocks rose to their highest point in nearly three months last week, with the KBW Bank Index trading at an average of more than $42 at one point last Thursday. That’s a far cry from the $32.81 the KBW Bank Index opened at on October 4, albeit still just a third of the nearly $120 average the bank stock index achieved in 2007. But it’s a start.
Despite last week’s gains, bank stocks remain cheap. Bad publicity left over from the recession lingers and Occupy Wall Street protesters continue denouncing bank stocks on the streets of some of the largest cities in America. It will take some time before bank stocks return to – or even approach – their pre-recession levels.
Still, for the patient investor, bank stocks appear to be a solid long-term buy. Many of them are trading at prices well below what their valuations suggest they should. Most of the big banks boast single-digit price-to-earnings ratios.
Since bottoming out on October 3, the stock prices for JP Morgan Chase, Bank of America, Morgan Stanley, Goldman Sachs (NYSE: GS) and Citigroup (NYSE: C) have all made steady gains in the market over the past month. All five big bank stocks had made gains of at least 13 percent since October 3 at the start of trading today. Morgan Stanley and Citigroup’s stock had risen more than 20 percent. Only JP Morgan failed to outperform the S&P’s 13.7 percent gains over the last four weeks.
The gains made by the big banks bode well for smaller, regional bank stocks, which you can read more about by subscribing to our High Yield Wealth newsletter.
Despite their recent gains, many bank stocks hit all-time lows on October 3, so they are still cheap – at least by bank stock standards. So while big banks remain hated among the general public, even as the cries from the Occupy Wall Street protesters grow louder and louder, bank stocks appear to be more likable than ever.
