Thread: Evaluating Bank Stocks

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  1. #1

    Default Evaluating Bank Stocks

    There are nearly 7000 banks in the United States compared to just a handful in most other countries. Nearly 300 of these banks are publicly traded stock companies, and the majority of them are not covered by any analysts, making this fertile ground for investing.
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    There are 3 categories of banks, the handful of so called Money Center Banks, the 12-15 Regional Banks and the largest 10 of these are sometimes called Super Regional Banks. The rest of the thousands of banks are called Small Local or Community Banks. Do not confuse these Regional Banks with the Fed's Regional Banks. Also note, there are Investment Banking stocks such as Goldman Sachs (GS) and Morgan Stanley (MS) and scores of much smaller investment bankers. The Money Center Banks also have their own Investment Banking divisions. All of these plus insurance companies (discussed in the next chapter), fall under the broader category called Financials.
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    MoneyCenter Banks and Investment Bankers are actually cyclicals, because they are much more affected by the economy than Regional Banks and Small Local Banks. Regional and Small Local Banks tend to behave more like Medium Growth and Slow Growth Stocks than Cyclicals. MoneyCenter Banks are giant banks that have operations throughout the country and also have significant international operations. They also have money management and investment banker operations, trading/investing and other businesses. The former CEO of Wells Fargo was on TV the other day saying his company "has 90 different businesses". The Money Center Banks currently are JP Morgan Chase (JPM), Bank of America (BAC), Wells Fargo (WFC) and Citigroup (C), and they boom and bust along with economy, and therefore, are considered cyclicals. Citigroup, for example, has alternated between booms and teetering on the verge of bankruptcy at least 4 times since 1970.
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    Money Center Banks - You can make a ton of money on Money Center banks by buying them during recessions and selling them during booms, and I have benefited from doing this several times. Of course, you can also lose everything if you own a Money Center Bank during a recession, and it is too weak to survive until the recovery comes, as I did with the doomed Washington Mutual. When recessions hit, their profits typically plunge and so do the stocks. You don't want to be in a Money Center Bank (or Investment Banker) headed into the next recession or next "banking crisis", such as the 1983, 1989 and 2008 banking crises. On the other hand, like all cyclicals, a tremendous amount of money can be made on them coming out of recessions, and you will find multi-baggers here.
  5. #5


    You want to buy Money Center Banks (and Investment Bankers) at the depths of recession when business is horrible and after the stock has lost 50 to 90% of it value. Of course, you MUST first determine if the bank/investment banker can actually survive the downturn, because if it doesn't and goes bankrupt, you will lose everything. That is what happened to me with Washington Mutual. The key measure in cyclical bottoms is the Equity to Assets Ratio. A typical Equity to Assets ratio is 6. Anything above 6 means the bank is strong and will likely survive. The higher the better. Any number above 8 means the bank is extremely strong. In a bad recession, you will see numbers below 6. Avoid any bank with an Equity to Assets ratio less than 5; the risk is too high, that the bank could go under completely. When a Money Center Bank issues its quarterly earnings statement, the release is usually many pages long. They rarely mention the Equity to Assets ratio in their write-up, so instead, you have to scan through table after table until you find the Equity to Assets ratio. Sometimes, they don't even provide the ratio, so you have to find total assets and total equity and calculate the ratio yourself by dividing total equity by total assets and multiplying by 100. Once you buy a beaten down Money Center Bank/Investment Banker during the next recession/"banking crisis" you want to carefully monitor Equity to Assets ratio every quarter, until the economy improves and the bank's earnings start improving.

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