US banks have had a tough time since the financial crisis.
American lenders and their foreign rivals have shelled out more than $100 billion in US legal settlements since the housing market meltdown and financial failures of 2008 and 2009, according to one estimate.
Dodd-Frank
On top of that, banks have faced a much tougher post-crisis regulatory environment, thanks to the Dodd-Frank reforms and the Consumer Protection Act.
Big Wall Street banks also face stepped up competition from super-regional banks in Asia such as ANZ of Australia and DBS (DBSDY) of Singapore. ICBC (IDCBY) in China, Brazil’s Itaú (ITUB) and ICICI (IBN) in India are also emerging as global players.
Small wonder, the S&P 500 Financials Index has underperformed the broader stock market over the past five years.
Bullish Case
While banks as a group face challenges, some analysts argue that there are attractive opportunities going forward for the discerning investor interested in picking up bank plays for his or her portfolio.
First off, the banks’ capital base is far stronger than six years ago.
On March 5, the US Federal Reserve released the results of its stress tests designed to assess a lender’s capital base in the event of another crisis.
Dividend Plays
All 31 of the banks examined by the Fed passed with flying colors.
That matters, because banks will now have more freedom to pay out bigger dividends, according to Dan Werner, an analyst at Morningstar Research.
Werner thinks that Bank of America (BAC) and Citigroup (C) may consider boosting their dividends.
The same goes for American Express (AXP) and Discover (DFS). Share buybacks are another possibility, Werner recently wrote in a research commentary.
Fed Hike
Then there’s the strong likelihood that the US Federal Reserve will hike interest rates in 2015, a move that would help bank profit markets on loans.
In late February, Jefferies bank analyst Ken Usdin offered five ways to play the financial sector in the coming environment or rising interest rates.
He likes Bank of America among the big money center banks for its strong balance sheet and vast retail network.
Fifth Third Bancorp (FITB) is his pick for exposure to regional banks.
Filling out his lineup the Alabama-based, commercial bank and insurance products provider Regions Financial Corp. (RF), State Street Corp. (STT), which offers financial services to institutional investors, and Wells Fargo & Co.(WFC), the dominant player in home mortgage lending.
Takeaway
The competitive terrain for American banks has taken a nasty turn since the financial crisis.
The good news is that the banks are stronger, the economy looks robust and lenders have more flexibility to raise dividends and buy back stock.
Investors seeking exposure to the financial sector appear to have some choices.
Continued Learning: Do our financial smarts fade with age?
Photo Credit: Mike Mozart via Flickr Creative Commons
The investments discussed are held in client accounts as of March 11, 2015. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable.
