Banks across the country are under pressure, and it is starting to show. Four US banks have failed already this year (three in the last month) compared to zero last year. The reasons why are many, but low interest rates and strong competition have been impacting the space. The four bank failures do not seem to be due to a particular asset class, but particular idiosyncratic circumstances. Still, as mortgages have seen lower rates, banks are more and more likely to move into more risky areas to boost yields.
FINSUM: In 2006 there were zero bank failures, in 2007 there were three, in 2008 it was very ugly. We do not think we are going down the same rode, but it is a sign worth noting.
Bank stocks are probably not a good bet right now. They suffer when rates fall and they are quite exposed to economic slowdowns (in other words, ignore the new idea that banks are safe dividend producers like utilities). However, there are some banks and financial stocks that look likely to win in the near- to medium-term. Three names to consider: JP Morgan, Amex, and Discover. JP Morgan is basically just a very healthy bank with increasingly competitive pricing which looks likely to grow EPS nicely over the next few years. Amex is an interesting pick because it has a very high quality customer base, and its unique charge card revenue base is not so exposed to falling interest rates, making it much more defensible in a low rate/recession environment.
FINSUM: The Amex pick is quite unique. Their customer base is higher end, so less affected by recession. And their unique revenue model (for a card company) means they have lower interest rate exposure.
There are a handful of safe haven stock sectors that investors tend to rely on during market downturns. Healthcare, utilities, and REITs come to mind. Lately, some have been saying bank shares may also prove a good defense. However, investors should be very wary of two of those just mentioned: healthcare and banks. While on the surface healthcare stocks look very good for a recession—it is not as if people stop getting sick—the reality is that there has never been more regulatory pressure on the sector (from both sides of the aisle), which means it is far from safe. Additionally, the idea that banks have become safe, utility-like dividend machines is flawed, as bank earnings are very exposed to the economic cycle, and thus will likely see big moves in both price and yield.
FINSUM: We agree with this assessment entirely. Healthcare is more vulnerable than it has been in memory and banks are a long way from being dependable utilities (excellent PR job by Wall Street though!).
It has been forecasted for some time, but now it is finally happening—US banks are hiking dividends. After getting the all clear from regulators after successful stress tests, US banks are beginning to hike their dividends. For instance, Morgan Stanley and Citigroup hiked their dividends by 13%+ recently, with both now yielding 2.5% or over. Bank stocks have been beat up over the last year, with Morgan Stanley down 10%, for instance.
FINSUM: On the one hand, bank stocks looked undervalued and now have attractive yields. On the other, if you think we are headed towards a slowdown, then it is not a good time to buy financial shares.
If you want to pick up some great bank stocks at a great discount, now is the time to do it. Despite great earnings, JP Morgan still looks inexpensive. Goldman Sachs does too. Both banks saw big trouble in their trading divisions in the first quarter, which has led to some attractive valuations. The problem for investors is that markets that keep doing what they have will not be bullish for the banks (i.e. low volatility), so options strategies may be the best way to play the situation.
FINSUM: Nothing would be better for this trade than if there was another big market disturbance that drove a bunch of volatility, which is quite good for trading revenue.