Bank shares had a dream run in 2012, and any investor who bet
some money on the financial sector over the year with a medium to
long term investment horizon in mind would only be regretting one
thing, not investing more money than he or she did. After ending
2011 as the sector to incur the biggest losses, financial companies
showed a remarkable turn around in 2012, to become the sector to
gain the most value. The financial group that constitutes the
S&P500 increased in overall value by well over 25% in 2012,
compared to a 12% jump for the S&P500 index itself over the
period. The KBW Bank Index closed 30% higher on 31 December 2012,
than it did on 30 December 2011, highlighting the performance of
U.S.-based banks in particular for the year.
Most notably, Bank of America (
BAC
) more than doubled its value over the year. An interesting
coincidence here is that the global banking group swung from being
the worst
performing Dow Jones Industrial Average (DJI) component and the
fifth-worst
performing S&P500 component for 2011, into becoming
the best
performing Dow Jones Industrial Average (DJI) component and the
fifth-best
performing S&P500 component for 2012. The shares of the
U.K.-based banks Royal Bank of Scotland (
RBS
) and Barclays (
BCS
) also skyrocketed over the year, gaining 69% and 58% respectively.
Other U.S. banks that recorded some handsome returns are Citigroup
(
C
), with a 50% hike, and Goldman Sachs (
GS
), up 41%.
See our full analysis for Bank of America |
RBS
| Barclays | Citigroup | Goldman Sachs
|
Bank
|
Ticker
|
2012 Change
|
2011 Change
|
High
|
Low
|
| Bank of America |
BAC |
108.81% |
-58.32% |
11.69 |
5.62 |
| Royal Bank of Scotland |
RBS |
69.39% |
-56.22% |
10.88 |
6.01 |
| Barclays |
BCS |
57.60% |
-33.47% |
17.54 |
9.23 |
| Citigroup |
C |
50.36% |
-44.38% |
40.18 |
24.61 |
| Goldman Sachs |
GS |
41.06% |
-46.22% |
129.72 |
90.43 |
| Capital One |
COF |
36.98% |
-0.63% |
61.83 |
43.12 |
| UBS |
UBS |
33.05% |
-28.17% |
17.00 |
9.78 |
| JPMorgan Chase |
JPM |
32.24% |
-21.62% |
46.49 |
30.83 |
|
BNY Mellon
|
BK |
29.08% |
-34.07% |
26.25 |
19.30 |
| Morgan Stanley |
MS |
26.37% |
-44.38% |
21.19 |
12.26 |
|
Wells Fargo
|
WFC |
24.02% |
-11.07% |
36.60 |
27.94 |
| USB |
USB |
18.08% |
0.30% |
35.46 |
27.21 |
| Deutsche Bank |
DB |
16.98% |
-27.26% |
52.54 |
27.03 |
| Credit Suisse |
CS |
4.60% |
-41.90% |
29.97 |
16.09 |
The table above summarizes the change in prices for major bank
stocks in 2012, along with the change in 2011 for easy comparison.
Do note that the price change is calculated taking the closing
prices of a stock on the last trading day of a year to the last
trading day of the next year.
The fact that investors changed their outlook towards the
banking sector is evident from a single glance at the table,
with Bank of America swinging from the near 60% decline in 2011 to
an almost 110% rise in 2012.
2011 Was An Exceptionally Bad Year For Banks Due To A
Number Of Reasons…
The series of quick, demotivating developments in the later half
of 2011, caught investors off guard, and they responded by shunning
bank stocks. This period was marked by the S&P's decision
to downgrade the U.S. long term debt rating from the coveted
AAA to AA+ in August 2011 (see Looking at Why the Banks
Tanked). And then a string of mortgage-related lawsuits were
filed against the banks, with lawsuits filed by
the the Federal Housing Finance Agency (FHFA), against 17
global banks being the most notable ones (see Legal Woes
Continue for Bank of America). Europe's debt situation also looked
precarious around that time with fears of the crisis spreading
over to stronger Euro zone economies including France and Germany
gripping investors.
Bank stock were already down in the dumps when rating agencies
continued to demoralize investors with their regular downgrades or
announcements of possible downgrades of ratings for global banking
institutions, as well as European nations, leading to significant
declines in share price.
… And That Is What Makes A Rather Normal 2012 Stand Out
As Outstanding
Then 2012 came with its own share of problems. Europe continued
to report poor economic growth with the fears of a recession
looming at large from stagnating growth in the U.S. compounded by
swelling unemployment figures. China's economic growth slowed
towards the middle of the year, and a deadlock between the two U.S.
political parties over steps to avoid the impending U.S. fiscal
cliff figured high on investors' minds in late 2012.
The banking sector itself continued to receive major jolts.
Lawsuits related to banks' practices prior to the economic crisis
continued to surface every now and then. And even as regulators
pieced together tighter capital and oversight requirements for
financial institutions, JPMorgan's $6 billion loss from a hedging
strategy gone wrong raised questions about risk management at banks
(see JPMorgan's $2 Billion Hedging Loss Hits The Entire
Banking Industry). And Barclays' $451 million fine for manipulating
the benchmark Libor opened the door for investigations against 16
of the world's biggest banks in the Libor scandal
(see Barclays Paying $451 Million in LIBOR-Fixing Case, Who's
Next?).
But then, there was also a lot of good that came banks' way in
2012. The major banks settled some of their most sticking legal
issues, most notably the $25 billion foreclosure agreement by the
country's five biggest mortgage servicers (see Foreclosure
Settlement Makes it to Federal Court for Approval). House prices
showed a steady growth throughout the year, helping banks report
strong mortgage revenues. The Fed's decision to continue
buying-back bonds also gave the economy an impetus, spurning retail
and investment banking opportunities.
On their parts, almost all of the banks responded to the global
economic situation by announcing significant organization-wide
changes and cost-cutting measures while continuing to shore up
their capital. And some like Bank of America did so quite
effectively buoying share prices. After all, much of the decline
bank shares witnessed in 2011 was linked to their being perceived
as too risky, a perception that changed to a large extent over 2012
with quite some effort from the banks.
Investors start 2013 on a positive note, with hopes that the
recent deal between Democrats and Republicans will put concerns
about the fiscal cliff at bay and set the stage for future
agreements on other outstanding issues. The picture in Europe also
looks stable to a large extent with Euro zone members aiding the
weaker economies to ensure that they are not forced to abandon the
euro, something which could significantly devalue the currency.
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