Why the banking sector is better, but with room for improvement (Part 5 of 5)
So what does this mean for investors? Besides advocating that investors stay neutral the financial sector overall, we believe that there may be pockets of opportunity within the broader sector. In particular, over the longer term we like:
- Segments that are relatively insulated from regulatory uncertainties as compared to investment banks. Such segments include US retail banks and US regional banks.
Market Realist – The top U.S. banks have disappointed, with Bank of America (BAC) giving year-to-date returns of -1.93%, Goldman Sachs (GS) giving -1.86%, and JP Morgan (JPM) giving -3.01%. The only bank to have outperformed this year is Wells Fargo (WFC), with returns of 13.55% year-to-date.
On the other hand, relatively cheap, regional, and small-cap financial institutions seem to have done well. These banks include Valley Financial Corp. (YFC) with year-to-date returns of 9.12%, Capital One Financial Corp. (COF) with 4.61%, and Discover Financial Services (DFS) with 9.92%.
- US banks versus European banks. Looking forward, although the profits of global financials will be lower relative to pre-crisis levels, we believe US financials are now better prepared to weather these changes than their European counterparts.
Market Realist – The graph above shows the leverage ratios of U.S. banks versus European banks. American banks have comparatively higher leverage ratios, so they’re better equipped to face issues of profitability that might pop up in the future.
Read our series on The “Great Deleveraging” that never happened: The US debt problem to learn more about deleveraging in the U.S. economy.
Sources: Investment Strategy Group Research, Bloomberg
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