Their story has been pretty much the tale of the U.S. economy ever since the latter was declared in recession close to four years ago. Banks in the world’s largest economy walked around with the moniker of "too big to fail", but some have doddered ever since. But it turns out their misfortune could prove something profitable for investors with a sharp eye for a bargain.
The key ingredient for such investors is the ability to detect when big banks have reached a bottom, and, thus, when to dive in. Only this week, in the midst of the chaos ensuing from Europe’s debt crisis, banks on the once-mighty continent are facing downgrades left, right and centre, and their American counterparts could find themselves in much the same boat.
A piece in CNNMoney this week pointed to the latest downgrade victims, namely, Dutch behemoths ING and ABN Amro, who saw their ratings cut by Moody’s Friday, along with three lenders in France and one in Luxembourg. This got tongues wagging soon afterwards, with word that such august institutions in the States as Citigroup (NYSE: C), JPMorgan Chase (NYSE: JPM), Bank of America (NYSE: BAC), Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE: MS) could be next.
Granted, it’s not as though a possible downgrade would come as a shock to these banks. Other agencies like Standard & Poor’s and Fitch dropped ratings on big U.S. banks at the end of last year, and the CNN article pointed to banks trying to assure investors they're ready for any further cuts ever since Moody's first announced a review of the sector back in February.
As for anyone who doubts the soundness of the U.S. banking industry as a whole, the Federal Deposit Insurance Corporation reported this month that just 16 FDIC-insured banks failed in the first quarter of the year, the lowest total since the end of 2008.
Moreover, the FDIC stated that the industry posted a first-quarter profit of $35.3 billion, its best since 2007. FDIC-insured banks’ first-quarter profits grew 23% ($6.6 billion) from the year prior, marking the 11th consecutive quarter profits have shown a year-over-year increase (all figures in U.S. dollars).
Citigroup, provided it’s ready to take its lumps, could attract buyers to help it out of the bargain basement. The bank finds itself in the lower half of a 52-week range that peaked last July at $43.06, and gullied at $21.40 in October, before climbing to a respectable $28 level this week. Still, much will depend on how investors respond to its second-quarter earnings report in mid-July.
Also in the lower half of its range is JPMorgan Chase, whose CEO Jamie Dimon testified before Congress this week he was at a loss as to how the bank lost $2 billion in trades in recent months. What may have helped Dimon’s profile, however, is his assertion that sick-man banks shouldn’t be propped up, and his demand for what he called "Old Testament Justice" against "big, dumb banks."
Dimon went on to say that regulators should wind such sick banks down through the same orderly resolution process that got America out of the savings and loan crisis of the 1980s and 90s. Late Friday, JPMorgan Chase was trading at just a shade about $35 a share, far below its 52-week height of $46.49 to which it soared late last March.
Bank of America, while managing to avoid negative headlines this week, is also midway into a 52-week range that went as high as $11.25 late last June, and as low as $4.92 just before Christmas. What’s more, it may have bolstered its profile this week by announcing a bold new $50-billion environmental initiative.
Goldman Sachs hit just over $95 this week, well in the lower half of its range, and will also bring out quarterly numbers in mid-July; in the meantime, the bank has some egg to wipe off its face in light of its role in the Facebook IPO last month. Several lawsuits are pending against the social network and its underwriters.
Lastly, Morgan Stanley can be had on the cheap; its current price of about $14.20 is closer to its trough of $11.58 than to its 52-week peak of $24.46. But MS’s role in underwriting the Facebook launch needs to be sorted out, too, something for investors to consider before plunging in.
All U.S. banks are far from the knights in shining armour they once were. But the situation in which they are today could help investors in the future.
