Is now the time to invest in bank stocks? Bank stocks have been battered over the last year with the triple-whammy of declining home prices (reducing the value of collateral for mortgages that the banks originate), the collapse of the securitized mortgage market (so banks could not sell the mortgages they originate), and the recession (causing homeowners to fall behind in their mortgage and credit card payments). The epitome of the crises was the collapse of Indymac Bank, the 10th largest bank in the United States, which bank had to be taken over by federal regulators.
Have the clouds lifted and are the crises a thing of the past? Although there are a lot of bad loans still in the bank's portfolios - mortgages that are either in or near default, credit card debt of people in bankruptcy, and loans to builders that may not be paid, the banks are nevertheless making money on new loans. The yield spread (the difference between short-term rates paid on deposits and long-term rates received on mortgages) is very favorable for the banks currently. Wells Fargo (ticker: WFC), although taking a large write-down on non-performing loans, just announced a profitable quarter and increased its dividend. Even Citibank (ticker: C), which was threatened with insolvency before raising capital last year announced a profitable quarter and maintained its dividend. Both banks are paying in excess of a 5% dividend.
Here are the positives for bank stocks for the next three-to-five years: the worst news is already out and included in stock prices, the large bolus of adjustable rate mortgages has already moved through the adjustment cycle with just another six months of these large monthly volumes of adjustable rate mortgages getting reset, the steep yield curve contributing to profitable current operations, and the Federal Reserve Bank not taking steps to increase interest rates. These trends point to banks working their way out of the crisis back to profitability. Strong banks with good management will survive, their stock prices will increase, and dividend yields will shrink. Wells Fargo (WFC), Citibank (C), Bank of America (BAC), Regions Financial (RF), and Wachovia (WB) should survive the storm that hit the banking sector and provide favorable long-term returns.
