With all the headlines this year about a weak global economy and pending fiscal cliff, you would think that the banking sector would have been weak. You would be wrong, as the banking industry was one of the strongest performers during 2012.
All of the major financials enjoyed strong runs in 2012. Here are some of the biggest U.S. banks and what their stocks were able to accomplish in 2012:
- Bank of America (BAC): +106.1%
- Wells Fargo (WFC): +25.8%
- Citigroup (C): +47.5%
- JP Morgan (JPM): +33.7%
Not too bad considering that the Dow Jones Industrial Average was up just 5.9% during the same period. With such a strong 2012, everyone is wondering if the major banks will be able to repeat that success next year… but not everyone is so convinced.
The skeptics have plenty of reason to believe 2013 will fail to live up to 2012's standards. They point out that a big reason why there was so much buying in the bank stocks was that their values were so depressed during the recent recession, and offered such a strong buying opportunity… that is less attractive at current levels. While they agree that loan applications will pick up, analysts point to low interest rates as a factor limiting the potential earnings that can be made from making loans.
Those points are sound, but not everyone believes that the run has come to and end.
One reason to remain positive on banks is that despite their run up in price during 2012, they are still trading relatively cheap compared to the overall market. The banking industry is, on average, trading at 11.1 times projected earnings for the next year. At that level, it is the cheapest sector tracked by the S&P 500.