With all the 2012 headlines about the global economic crisis, 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 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 was up just 5.9% during the same time period. With such a strong 2012, everyone is wondering if the major banks will be able to repeat their 2012 runs next year… and not everyone is so convinced.
The skeptics have plenty of reason to believe 2013 will fail to live up to 2012 standards. They point out that a big reason why there was so much buying interest in the bank stocks was their values were so depressed during the recent recession, and offered such a strong buying opportunity… one that is not so attractive at current levels. While they agree that loan applications will pick up, they point to low interest rates as a limiting factor in earnings that can be made on each loan.
Their 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 versus the overall market. The banking industry on average is trading at 11.1 times projected earnings for the next year. At its current level, it is the cheapest sector that is tracked by the S&P 500.
But there is no question that banks have limited growth potential, mainly because of the handcuffs that have been placed on them following the economic crisis. The government is trying to keep them from growing too much in order to prevent another meltdown like we saw just a few years that sent the entire economy into a tailspin.
So what can banks do to keep growing? One answer would be to start breaking up.
Most of the major banks have their hands in many different cookie jars. If the major financial companies were to break apart their investing and depository businesses, it could unlock a great deal of value in both businesses.
In their current form, banks are huge, and tough to manage on a central basis. Should they break up, you would get better, more focused management of the pieces, and that in itself should lead to more efficient business models.
If banks were separate from the investing arm of the company, it could operate with lower capital requirements, which in turn to lead to more loans being made. This business would be more stable than one that is connected with investing, could up its dividend, and should in theory lead to better stock gains.
On the other side of the coin the investing business would be more volatile, but with that added volatility you could see much higher returns. They would not be tied to any potential loan problems, and could focus their attention solely on improving their trading and investing business.
I do not expect to see any major breakups occur in 2012, but it definitely seems to be a direction in which the industry should, and will, move.