The year of banking dangerously

If the rise in shares is any judge, investors don't seem to mind living a little on the edge.

By TheStreet Staff Sep 13, 2012 12:36PM logoMature man building house of cards, copyright amana productions inc., amana images, Getty ImagesBy Richard Saintvilus


On May 10, banking giant JPMorgan Chase (JPM) reminded Wall Street just how dangerous the financial sector really is.


The bank dropped a bombshell on investors upon disclosing it had amassed a significant credit-derivative loss. Initially, the loss was said to be approximately $2 billion, but then the bank said the poor trade had actually reached levels of almost $6 billion this year with a chance of possibly reaching $7.5 billion, when all is said and done.


This reminds me of a quote from Warren Buffett, who once said, "Derivatives are financial weapons of mass destruction." He was right.


It's hard to believe it's been over four months since this announcement. However, when looking at the overall health of the financial sector and what has transpired for most of the year, with names including Bank of America (BAC), Citigroup (C) and Goldman Sachs (GS), the only theme that I can come up with is that so far it has been the year of "banking dangerously."


I say this because aside from the fact that many of the names have (one way or another) shot themselves in the foot, the European debt situation continues to drag on several banks indirectly impacted by the financial concerns abroad. Remarkably, it doesn't seem that investors care a whole lot. I have to confess, I don't blame them.


The initial news hit the markets pretty hard: $2 billion is still $2 billion, regardless of the company's size or assets. On the other hand, Wall Street realized something -- we've been down this road before. After all, it was not too long ago that each of the largest major banks needed a government bailout for their part in the credit crisis.


However, nothing says "I'm sorry" better than a solid quarter with better-than-expected earnings. This was exactly what JPMorgan delivered.


In its most recent quarter, the bank reported net income of $5 billion, or $1.21 earnings per share. It produced solid results in its retail banking as well as Treasury services. What's more, it generated lower-than-expected losses on loans. It showed considerable improvements in key areas such as mortgage loan origination, which was up 29% annually and 14% sequentially.


Also showing growth were mortgage loan applications, which surged 37% from the previous year and 12% from the first quarter. So clearly there are plenty of reasons to be optimistic about its chances of a recovery.


But JPMorgan was not alone. Though it was a somewhat underperforming quarter for investment banks, there were a few financiers that continue to show signs of modest improvements, including Bank of America, wich, arguably, outperformed expectations.


Not only did Bank of America report net income of $2.5 billion, or 19 cents per share, but its common capital ratio for tier one showed a 46 basis point improvement since the first quarter and exceeding 11%. What this means is that patient shareholders will be rewarded much sooner rather than later as these improvements can help spur stock buybacks as well as the company's ability to issue dividends.


Not to be outdone is the recent performance of Citigroup. Upon looking at its numbers more closely, it seems the bank continues to produce modest returns on equity, suggesting its current share price just might be significantly undervalued.


What's more, excluding items such as intangible assets from book value and goodwill, one can make the case that the stock should be trading in the low $40 range, representing a potential premium of 40% from current levels.


So as the stock trades today at $30 with a modest price-to-earnings ratio of 8, one can make the argument that there might not be a better bargain than Citi within all of the financials. Its fundamentals suggest there may yet be close to 50% to 70% upside over the course of the next 12 to 24 months.


I suppose this supports my theory of why it appears investors do not seem to care about the current brush of negativity towards financials and are actually looking more towards the future.


At this point I have to say there is plenty to like with JPMorgan, Citigroup, Bank of America and even more impressive has been the performance of Wells Fargo (WFC). It was not mentioned earlier because, well, it has always been the cleanest name in the group and has had very little for which to apologize. Its slogan is "together we'll go far." And it went very far by posting a record profit in the second quarter earning $4.4 billion, or 82 cents per share -- topping analysts' expectations while demonstrating an annual growth of 17%.

Bottom Line

The good news is that since the early part of the year and at the height of the news by JPMorgan, cooler heads have prevailed and the world has not come to an end over a bad trade.


What's more, investors are reminded that each of the banks have performed extremely well not only from their recent earnings, but also on some recent stress tests to assess their long-term sustainability. These days, it seems that all of the banks are doing and saying the right things.


They are not completely void of risk but the difference is in assessing the risk in relation to the reward. As evident by the recent rise of bank shares, it seems investors don't mind living a little dangerously.



More from

Sep 13, 2012 2:53PM

The "years of banking dangerously" have only just begun. Not one criminal, shyster, bankster responsilbe for the greatest financial collapse since the Great Depression has been tried, prosecuted or jailed. As a result, nothing has changed. The game remains the same.

The Rule of Law is dead in America. Our corrupt, irresponsible and feckless government is in the pockets of all the worldwide bankers, the FED, all the Central Banks, and the corporate oligarchs. Free Enterpirse dead (just look at that babbling idiot at Facebook Zuckerman as he tries to hide the fact that Facebook is being co-opted by the corporate gangsters, lame stream propagandist  media mongers. The Free Market Economy is dead. America is DEAD.

And meanwhile, the fraudster Wall Street just gave themselves QE3, compliments of the FED.Enjoy all that free money boys and girls.

Sep 13, 2012 2:57PM
Moody's Says U.S Banking Outlook Is Negative

Moody's calls eight U.S. banks systemically important by virtue of their size, interconnectedness and difficulty to unwind. These are Bank of America Corp. (BAC), Bank of New York Mellon Corp. (BK), Citigroup Inc. (C), Goldman Sachs Group Inc. (GS), JPMorgan Chase & Co. (JPM), Morgan Stanley (MS), State Street Corp. (STT) and Wells Fargo & Co. (WFC). The ratings firm's outlook on these institutions' bank holding companies' ratings is negative, while the outlook on their bank or operating subsidiaries' ratings is stable. "Put simply, we believe government support for creditors of bank holding companies is becoming less certain and predictable...
Sep 13, 2012 3:52PM
according to Mr Bernanke we will Cary this sick economy for years to come the peoples will not going to live with this stress for long time no one can make plan with uncertain time to by house cars or other improvement when the threat of loosing job in the horizon printing money is not the solution the commodity. fuel will go up and to buy them will be difficult we will be in a situation that minority of peoples we enjoy the life and the majority will eat dust
Sep 13, 2012 4:52PM

Where is he getting the money?  Printing it?  Or does he get it from us taxpayers?  It makes our dollar weaker which of course makes our buying power weaker.


My daughter just got a home loan and it has a 9% interest rate.  The banks are making out like bandits.


I suspect the truth is that the powers that be want to bankrupt the country and get out from under the debts it owes.


Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
100 character limit
Are you sure you want to delete this comment?


Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.


StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

125 rated 1
264 rated 2
485 rated 3
679 rated 4
640 rated 5
617 rated 6
632 rated 7
493 rated 8
276 rated 9
153 rated 10

Top Picks

TAT&T Inc9



Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.