I was asked which bank to invest in the other day, and it’s been on my mind ever since, as that’s a tough question.
Which bank stock would you buy?
Since January 2008, Bank of America has lost nearly 56% of its value, compared with 81% in Citigroup and 4% at Goldman Sachs. Conversely, J.P. Morgan has gained 47%, while Wells Fargo is higher by 91%. RBS has lost over 90% of its value, Lloyds 66%, Barclays 50% and HSBC 46%. BNP Paribas has lost 40% of its value, Banco Santander 53% and Deutsche Bank 65%.
And yet I regularly get tips to buy bank stocks.
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According to a recent article in Seeking Alpha, PNC Financial Services Group, Discover Financial Services and Charles Schwab are all worth a punt this year because of their digital millennial positioning (these banks gained 30%, 420% and 10% in value since 2008 respectively).
As can be seen, the American banking market has fared significantly better than the UK and European landscape, so which banks are worth a punt this year?
You could to the Asset Quality Review (AQR) to check out the banks to watch and avoid in Europe this year. The AQR and stress test results showed that 25 banks were viewed as failures, and now need to raise €25 billion of new capital. To pass the tests, banks had to show that they had ample capital to survive a crisis that would cause Europe’s economy to fall 7% below current forecasts and the unemployment rate to rise to 13%.
Table 14 in the aggregate report provides a breakdown of significant adjustments (over €1 billion) by banks from Greece (4), France (4), Italy (3), Germany (2), Netherlands (2), Portugal (1), and Austria (1), with the biggest adjustment (€4.2 billion) by Banca Monte Pasch di Siena. In fact, Italian banks had the lion’s share of the additional loan provisions (€12.1 billion), with other notable mentions including Greece (€7.6 billion), Germany (€6.7 billion), France (€5.6 billion), Spain (€3.0 billion), and Austria (€3.0 billion).
I guess I would avoid banks in those countries therefore or, if you’re brave, you could take the opposite view and say they’re worth the investment as they’ll bounce back (we thought that about RBS, Barclays, HSBC, etc).
You might have a bet on JPMorgan, as their value has risen since the crisis hit, but not if they’re going to become two banks. According to Goldman Sachs, new capital rules that penalize big banks will put pressure on JPMorgan to break itself up to boost its stock price.
Or you might buy some of the share sale of Lloyds, with another 5 percent tranche due for a sell-off before the May general election in the UK. This follows two previous sales in September 2013 and March 2014, with the government making £7.4 billion from the sale of 14% its 39% shareholding so far, at a price higher than the 73.9 pence paid in 2008 during the bailout. However, this newest share sale may be a challenge when the bank is trading at 73.9 pence today.
You could take some sound advice from Motley Fool¸ where writer Prabhat Sakya sees a good year ahead: “Overall, the picture is positive, and I expect bank share prices will be higher by the end of the year. Will 2015 be the year that the banks finally begin churning out profits consistently? It just may be.”
That was published on January 12th. On January 5th, Motley Fool’s commentator Harvey Jones says: “There may still be opportunities out there, but this could be the year that investors realise the big banks may not stay big forever. There are far safer ways to make big money in 2015.”
In other words, NO ONE KNOWS!!!!
And, if I had $1,000 to invest, I wouldn’t put it into the incumbent big banks anyway. I’d invest in the challenger banks like Metro Bank, Shawbrook Bank and Aldermore Bank, or the other startup challengers that are just launching such as Charter Savings Bank, Starling Bank and Atom Bank.
Or I would give up on banks entirely and invest in fintech innovators like Currency Cloud, eToro, Nutmeg and co.
Or I would look at the rapidly growing markets for alternative finance, which some say is no longer alternative but mainstream. From the Daily Mail last week:
“Alternative finance businesses, which find backers for small companies that can’t get bank support, are almost doubling every year, having reached a £1billion milestone for lending in 2014, according to one of the industry’s leading figures. Louise Beaumont, founder of Platform Black and now head of public affairs at AIM-listed GLI Finance, said the sector was so big it may even have to change its name. 'If 2014 was the year that alternative finance came of age, then 2015 is the year that it will finally shake off its prefix of being alternative,' Beaumont said.”
The growth sectors are the sectors circling around the incumbent banks, rather than the incumbent banks themselves. Anyone disagree?