Bank stocks are popular again as many are healthy seven years after the credit crisis and onset of the Great Recession. Interest rates are going to go up which is typically profitable for lenders. But, as Money writes, there are risks of banking on bank stocks.
For starters, investors fear regulations, says BlackRock’s global chief investment strategist Russ Koesterich. Banks are still paying for the sins of the Great Recession, through fines, settlements, and increased oversight, which lead to higher costs. J.P. Morgan Chase alone incurred $487 million in legal fees last quarter.
Until the Fed hikes and you see how long-term rates react, “financial stocks are basically in a holding pattern,” says S&P Capital IQ’s Erik Oja. So it’s critical to hold the right types of financials in this unpredictable environment. These steps will help you find them:
The article goes on to suggest that investors avoid banks that have repeatedly found ways to mess up and look for banks that have simple methods of making money. Here is where the question, why invest in Wells Fargo (WFC) comes into play.
The Warren Buffet Approach
The famous investor believes in investing only when he has a clear idea of how a company makes it money and will continue doing so. The beauty of investing in Wells Fargo as opposed to other banks is that it is the largest collector of retail deposits which gives it cheap access to a substantial cash flow. Wells Fargo was selling for less than thirty dollars a share in 2010 and now trades in the high fifties. The company pays quarterly dividends which have been at 35 cents a share for more than a year. Why invest in Wells Fargo? The company is sound, pays a dividend and is growing. But are there alternatives?
Hot Bank Stocks
InvestorPlace looks at the biggest movers in financial stocks. The top nine on their list:
- Banco Macro S.A. (BMA): BMA stock is up 2.0% today.
- Barclays Plc (BCS): BCS stock is up 1.6%, marking the third consecutive day the stock has increased.
- Royal Bank Scotland Group Plc (RBS): RBS stock is up 0.8% today.
- Marketaxess Holdings (MKTX): MKTX stock is up 0.5% today.
- First Citizens Bancshares (FCNCA): FCNCA stock is up 0.8% today.
- MBIA Inc (MBI): MBI stock is up 0.8% today.
- Genworth Financial Inc (GNW): GNW stock is up 0.8% today.
- Eagle Bancorp (EGBN): EGBN stock is up 0.5% today.
- Nomura Holdings Inc ADR (NMR): NMR stock is up 0.6% today.
- Assurant Inc (AIZ): AIZ stock is up 0.5% today.
Our question when looking at this list of hot performers is why should we invest in any of these and not in Wells Fargo? Remember. Avoid stocks that repeatedly find ways to mess up and stock with stocks that are proven long term money makers.
How soon will interest rates go up and how far? That is the question for banks. Banks make their money on the interest rate spread between what they charge for loans and what they pay for deposits. Markets watch statement of the US Federal Reserve and especially its chairwomen, Janet Yellen. At the current time the Fed expects to see a slower increase in interest rates than previously expected.
The Federal Reserve indicated on Wednesday, following a meeting of its policy committee that it plans to raise interest rates even more slowly than its officials had previously predicted.
The Fed still plans to start raising rates before the end of the year. Janet L. Yellen, the Fed’s chairwoman, said that growth had rebounded after a difficult winter, and that the Fed was simply waiting to make sure the economy was finally ready for higher rates. But she emphasized that even after rate hikes began, borrowing costs would remain low for years.
Why invest in Wells Fargo? Its access to retail cash probably puts it at an advantage against other banks now and when interest rates go up.