Between anxiety over the impact of new government regulations, a double dip in the housing market and a general distate for big banks, it’s no surpise that financial goliaths are experiencing a rough patch. There does; however, seem to be a quiet whisper around the market that maybe, at these prices, big banks are worth it. A recent Barclay’s report purports that the worries seem extreme and that in spite of obvious concerns banks will not endure endless months of weakness and loan losses. Barclay’s maintains overweight recommendations on Citigroup and Bank of America, and places market weight ratings on J.P. Morgan and Wells Fargo. Barclay’s isn’t the first institution to suggest that financial stocks could be on there way up. Superstar investor Warren Buffett also increased his position in Wells Fargo, presumably on the basis that this period of weakness will be short lived.
Wells Fargo; however, is an interesting choice for the oracle of Omaha, considering it has the highest exposures to the areas that concern investors most. Wells Fargo for instance has the highest exposure to bad loans in areas like commercial real estate and construction equity, meaning that further defaults could push shares beneath even their current levels. At 27 percent exposure, Wells Fargo is highly vulnerable to the still suffering housing market proving that while banks could be good buys right now, not all of them are created equally.
So what bank stocks look good then? It depends how that is being defined. If it's by the amount of exposure the institution has to the weak parts of the market, and many parts of the market are still doing well, then the list is as follows. There is considerable progress in the more substantial segments of the aggregate loan portfolio according to the Barclay's analysis. Credit card, mortgage, and C&I are all improving, meaning bank stocks do have the potential to improve. That being said there remains a lag between initial delinquency, continued loan losses and unrelenting problems in home equity, commercial real estate, and construction. That said, a complete reversal is unlikely, at least in the near future, but investing in the banks that have most of their revenue relying on the strong rather than faulty parts of the market make for a good investing guide.
Citigroup (C): Citigroup, in spite of its struggles, only has 5 percent exposure to the commercial real estate, home equity and construction, the area responsible for 3o percent of all loan defaults.
J.P. Morgan (JPM): J.P. Morgan has the second least exposure of the major financial institutions with 17 percent vulnerability.
Bank of America (BAC): Bank of America has narrowly more exposure than J.P. Morgan at 18 percent but faces challenges in other areas of its business for instance demands that fees for credit card transactions be reduced from an average of 44 cents, to a around 12 cents. Bank of America is especially vulnerable to this legislation as a considerable portion of its business relies on this.
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