But if I knew how to manage my portfolio safer and smarter than most hedge fund managers, I could realistically grow my wealth.
The must-know investor outlook for the US banking industry
So what does this mean for investors? Besides advocating that investors stay neutral the financial sector overall, we believe that there may be pockets of opportunity within the broader sector.
The regulations designed to make banks less risky may impair the global banking sector’s profitability going forward.
More work still needs to be done in shoring up the European banking sector. US banks are in better shape, and are further along in the recapitalizing and deleveraging processes than European banks.
This good news is a big reason why my team and I are less bearish on the global financials sector than we have been in the past.
Russ explains the good news behind his upgrade of the global financial sector as well as the bad news keeping his sector outlook somewhat subdued.
The economy has been slowly but steadily reducing the debt burden. And like all myths, there is a kernel of truth. The U.S. financial system has indeed made significant strides in reducing leverage and U.S. banks are better capitalized.
In the coming years, banks will need to focus on evolving and re-energizing themselves to stay ahead of the game. Bigger banks like JPMorgan (JPM), Bank of America (BAC), Well Fargo (WFC), and Citibank (C) have already started the process while smaller banks which are a part of an exchange-traded fund (or ETF) like the iShares U.S. Regional Banks ETF (IAT) should also take their lead.
The period from 2006–2012 wasn’t very good for the banking industry due to the economic slowdown across the globe with a negative return on equity in 2010—however, 2013 started the beginning of recovery with the return on equity again again touching 10%.
Banks generally do well during a good economic environment—profits of banks like Goldman Sachs (GS), Morgan Stanley (MS), U.S. Bancorp (USB), and PNC Financial Services (PNC) are showing a positive trend when the economy is robust.
Custodian banks like a warehouse and store other financial institutions’ and individuals’ assets—they help in keeping financial instruments safe.
When a firm takes on very high leverage and the trade turns out to be a loss, it can wipe out a bank’s entire profits and capital very quickly—during the sub-prime crisis, the collapse of Lehman Brothers—the largest bankruptcy filing in U.S. history—was due to leveraged trading.
Investment banks generally deal with corporations and governments—they help corporations and governments raise capital, both debt and equity, and provide advise for strategic decisions such as mergers and acquisitions and divestitures.
When a borrower isn’t able to pay back the loan, the loan is considered a non-performing asset (or NPA)—since the money for lending came from a depositor, the bank needs a large enough pool of capital to withstand such a shock.
Generally, the interest charged from those who took the loans is higher than the interest paid to depositors—the difference in the interest earned and interest paid is the interest income that is essentially the money made by the bank from its core operations.
After the Glass-Steagall Act was abolished in 1999, most small and a few large banks continued to focus on one stream of the business—however, most larger banks diversified into the other businesses after 1999, but continued to derive a major part of their income from one business stream.
There a large number of players that are each vying for share in the same market—there are a few large players who are present across the U.S., but most banks have pockets of strength.
The National Banking Act of 1863 and 1864 established a system of national banks to curtail wildcat state banks—however, this didn’t have the desired impact.
The first challenge is that banks are highly regulated and any change in regulations has a huge impact on the valuation of a bank—the second challenge is that it’s difficult to determine cash flow for a bank because both debt and reinvestment are difficult to calculate.
In the ancient European civilizations of Greece and Rome, there was a rudimentary banking system—the banking systems in most places continued to change over time.
Most of the stocks, in a financial exchange-traded fund (or ETF) like the iShares U.S. Financial Services ETF (IYG), have been portrayed in a negative light—all this is despite banking being one of the oldest and most important businesses in the world.