16 July, 2007

Money Holders: The Bank Story

All this excitement over the sustained tech rally combined with the lingering negative sentiment from the sub-prime mortgage meltdown has given the Bankers a bad rap.
Year to date the major bank stocks in America are either flat or down, all this while the market rallies longer and later in the year than usual.
And banks are typically very solid dividend plays, so what gives with the lack of respect?

It's clear that once this sub-prime fiasco is put to bed the industry can lift itself from the under performing rug and enjoy the spoils that investors have bestowed on seemingly the rest of the market. Earnings announcements are coming this week from JP Morgan Chase (JPM), Merrill Lynch (MER), Banc Of America (BAC) 4.5% yield, Citigroup (C) 4.1% yield, and Wachovia (WB) 4.3% yield

The chance to get in on these major banks is now as the forward P/E's of BAC, C and WB are below or right at the magic 10 multiple.

On the Canadian side of the market, the banks have performed very well over the last 6-8 months, however these gains are being put under pressure due to raised interest rates on inflation fears, the continuing strength of the Canadian Dollar, and simple valuations. However as these Canadian banks have come off their highs, buying opportunities are available.
CIBC (CM) hit a 52-week high of $107, while now sitting at $98
Royal Bank (RY) hit a 52-week high of $61, now sits at under $58
Similar patterns can be seen for Bank Of Montreal (BMO), TD Bank (TD) and Bank of Nova Scotia (BNS), although the latter 2 have not fallen off their highs as much as their peers.

This industry is lying in the weeds and it seems ready to join the party in the coming months. And while the waiting game is on, it's always a good thing to cash in on those +4% yields.

Disclosure: Author is long BAC, C, WB, RY


Adam said...

Saw your link at the core four blog and added it to my daily list. Considering your banking discussion, was just curious about your thoughts on ING (http://finance.google.com/finance?q=ING)

Chris Krasowski said...

ING is another good banking name that built its reputation of late as being the bank that gives your savings the highest interest rate. This was certainly a draw to consumers in North America, as the company tried to expand into this marketplace. They advertised heavily here, especially in Canada. More and more banks have begun to offer similar types of accounts within the last 12 months.

It's a great long term hold, and dips below 44 would be a very good buying opportunity. Pays a good dividend and in fact just paid $0.99/share at the end of april. It's P/E sits in single digits as does it's forward P/E. I believe they are trying to grow through acquisitions (smaller local europe banks and real estate trusts of late), which should bode well longer term for the company.