It's taken longer than many had hoped, but banks are finally a
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 favor of abstract
concepts such as "capital levels" and "valuations."
My bullishness is not simply based on banks being oversold (which
they are). Nor is it just a question of them being overcapitalized
(which they are). Nor is it a matter of all the bad news being
priced in (which it is).
No, the real reason to buy the banks is that the growth story is
For years we have 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 Federal Reserve's
, 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.
The pace of contraction in mortgage lending has also moderated from
readings of -5 to -10 percent in 2009 and 2010 to little-changed
now. Those are the official numbers. Anecdotal evidence paints a
For instance, I and my acquaintances have noticed more credit-card
offers in the mail over the last month. 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 his
We're also seeing increased mention of loan growth in analyst
reports on the banks in
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 that growth. 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
make sound investments because they've gotten cheaper while rents
have gone up. Headlines just this week are bullish as well:
Case-Shiller home prices yesterday, pending home sales today, and
good earnings from Lennar. Fitch Ratings also raised its
credit-rating outlook on D.R. Horton because of "better prospects
for the housing industry."
Lastly, banks have plenty of dry powder to lend. Their holdings of
"safe" assets such as Treasury and agency bonds now stands at 18.6
percent of balance sheets, the highest level since 2003. That
figure was below 12 percent back in 2007 and 2008.
You may ask, "Why banks, instead of some other sector that's beaten
down, such as energy or steel?"
The first reason is that banks are less sensitive to global
economic issues, notably in Europe and China. Second,
exchange-traded funds such as the XLF (broad financials) and the
KBE (just banks) have been consolidating above their 200-day moving
averages, while energy and materials remain well below theirs.
People have tried to call a bottom in banks for years. But now it's
I own FAS, which is triple-leveraged to the financial sector.
(A version of this article appeared in optionMONSTER's
What's the Trade?
newsletter of June 27.)