In praise of bank stocks

October was always the least dependable of months… full of ghosts and shadows. — Joy Fielding


If you’re familiar with the history of the stock market, you know that October is a month which has brought quite a bit of pain to investors.

The most obvious example is the crash of 1929, which led to the Great Depression and a prolonged business slump that left stocks in disdain by the public for a long time.

In 1987, October was again a month where an unlikely and unexpected selling tsunami took place, to the tune of a loss of more than 20% in a day.

Robust Market

Naturally, some analysts see trouble ahead citing valuations, lack of fear, complacency, and a top-heavy market dominated by tech companies and too much algorithmic trading.

However, so far, this October has been great, if you are long in the market.


Bank Earnings

It’s earnings season and the big banks such as JPMorgan Chase (JPM), Citibank (C), Bank of America (BAC), and Wells Fargo (WFC) reported another set of robust numbers.

In my opinion, the advantageous thing about the financial services industry is that there are many segments which could lead to profits.

Banks can make money in the following ways: retail and commercial banking, mortgage banking, credit card servicing, auto lending, and investment banking.

There is also revenue to be had from prime brokerage, merger and acquisition advising, asset and wealth management, treasury services, and proprietary trading (fixed income, currencies, options, swaps, and so on).

Diversified Revenue

Most banks don’t offer all of these services as each has areas they specialize in.

These areas afford different multiples that investors are willing to pay, depending on the nature of the entities’ revenue streams–and obviously the size and growth rate of each.

Hail Chase

In terms of scale, Chase just overtook Bank of America and Wells Fargo as the bank with the largest deposit base.

Chase also posted stellar profits figures and is generally first or second in every it competes in.

In my view, there’s a good reason JP Morgan CEO Jamie Dimon is considered one of the best bank executives in the world.

Photo Credit: Mike Mozart via Flickr Creative Commons