You Can Finally Buy Bank Stocks!

| July 3, 2012 | 0 Comments

It’s taken longer than many had hoped, but I think banks are finally a buy.

This sector has punished some highly successful investors who tried to bargain-hunt too soon after the 2008 crash.

In my view, their mistake was ignoring business momentum in concepts such as “capital levels” and “valuations.”

Simply put, my bullishness isn’t simply based on banks being oversold, over capitalized or even that of all the bad news is already priced in.

The real reason to buy the banks is that the growth story is back.

For years we’ve heard complaints about how lenders have been shrinking their balance sheets and refusing to make loans.

But that giant battleship is now turning, and there are reasons to think that it will continue.  The banks are lending again.

For one, the Federal Reserve’s H.8 data, which details bank finances, shows that commercial and industrial loans have grown at a double-digit annualized pace since the middle of last year.  That hasn’t happened since late 2007 and early 2008.

Not only that, the official numbers are that the pace of mortgage lending has increased from 5% to 10% percent over the past year.

And it doesn’t end there…

For instance, I have noticed more credit-card offers in the mail over the last few months.  One small-level real-estate investor I know was also just contacted by his bank to refinance a mortgage.

Two years ago, that same lender refused to take the investor’s phone calls.

In addition, we’re also seeing increased loan growth in analyst reports on the banks.

But there’s even more.

The Fed’s quarterly survey of loan officers shows that underwriting standards are being relaxed because of “aggressive competition” in the industry.

This is a big deal because banks follow a “herd” mentality.  Years of gloom are now lifting and will be followed by years of credit expansion.

So far, no one is pricing in this expansion.  In fact, most banks are still priced for depression.

There are also good opportunities to make profitable loans because millions of houses–especially multi-family homes in cities–now seem to appear to be sound investments because the cost of these homes have gotten cheaper while rents have increased substantially.

Lastly, banks have plenty more of dry powder?  In other words, they can do even more lending. Their holdings of “safe” assets such as Treasury and agency bonds now stands at 18.6% of their balance sheets, the highest level since 2003.

That same figure was below 12% back in 2007 and 2008.

Bottom line…

Believe it or not, the banks have been less sensitive to global economic issues, notably in Europe and China.  They haven’t had some of the incredible swings based solely on global news.

In addition, exchange-traded funds such as the Financial Select Sector SPDR (XLF) (broad financials) and the SPDR S&P Bank ETF (KBE) (regional banks) have been consolidating above their 200-day moving averages.

Buying some out of the money call options in these ETF’s is probably not a bad idea right now.  It could be a great summer for the banks.

Investors have tried to call a bottom in banks for years. But the bottom may now be finally here.

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Category: Breaking News

About the Author ()

Marcus Haber is the co-editor of Options Trading Research and boasts well over a decade of real-life options experience. Learning from some of the biggest names in the business, Marcus has served as an Options Strategist for a number of firms and was also appointed to the Options Advsiory Board with Pershing, a branch of the Bank of New York.