Banks as Utilities

We have written on this issue before, but wanted to post in it another time with some updated ideas for investing.  Banks are now nothing more than utilities which are fully regulated by the federal government.  One can add in some insurance giants and a few other large financial institutions, but for the most part large banks are now considered too big to fail and therefore on the regulatory road for the foreseeable future.  That is until we get enough years behind us to forget what just transpired in the late 1990's and early 2000's.  We give it until about 2080 when everyone who witnessed the financial meltdown will be dead and wonder why we are regulating banks so much.  It will be about that time that the strings will be undone and they will have their own version of 1929 and 2008. 

Anyway enough with why and how and who to blame, what does one expect from investing in banks going forward.  First off let's be real clear here we would not touch small banks since they are paying the same hefty price of high regulation  and have fewer customers to spread the costs across.  That is why so many local banks and small banks are fast merging. That and the federal regulators find large banks easier to regulate and may we say intimidate.  Banks being backed by the taxpayers all along got what they deserved for being unsafe with funds and thus we now deal with the aftermath as investors. 

Large banks are getting taken to the cleaners right now by AG Eric Holder and we believe now are being punished well beyond what is needed but for political purposes.  Someday and at some point the AG and his trial lawyer buddies will have wrung out all the money they can and the banks will again become profitable lending money via cheaper deposits as they should have all along.  We need a strong banking sector and we need profitable banks to make loans and finance business growth and the new jobs that come along with those loans.  Credit unions can not do that and are such treated differently by the federal reserve too.  Banks soon will be past the point where they need constant babysitting and political payback costs so here are the ones I see doing well going forward. 

Understand you will NOT get rich owning bank stock.  You WILL make some decent returns and eventually some good dividends.  In the early years here the capital gains can be nicer than the dividends since the federal regulatory agencies are going to restrict dividends until the banks show the ability to pay them consistently and the bank has built up sufficient reserves for safety. 

JPM...We like and continue to own personally JP Morgan.  This is the best run bank and has the most suppressed stock price due to many political issues.  Once they get past the graveyard rock stage the stock price will move up nicely and the already decent dividend will as well.  Maybe the best risk bank stock for the return. 

WF..Wells Fargo is all but in the clear safety wise and will likely ramp up the dividend payout more, but the capital gains portion might be past the slow rabbit stage. 

C...Citigroup has the most risk and most reward situation. Almost no dividend, but the stock trades significantly below book value.   The capital gains upside is significant therefore, but be prepared for some stock price movement up and down, We have owned this bank and will likely do so again in the future. 

BAC...Bank of America has both good opportunities for a rise in dividends and stock price, just in our opinion not as much as the others.  If the economy however were to take off, which is unlikely under current political leadership, this stock could move up a good bit due the large customer base. 

We see no other US banks we would invest in currently.  These four banks are head and shoulders above every other bank in the country. In fact they are the only banks with over $1 trillion dollars plus in assets, with the smallest Wells Fargo being 5 times the number 5 bank in size.  Remember the bigger you are as a bank the more customers and assets you can spread costs over reducing your cost per customer and enhancing your opportunity to make money for your shareholder.  If you need a job and can do regulatory work trust me the banks are hiring so consider the job opportunities there as well.