Are bank stocks good deals right now?

Question

Dividend yields are quite high, namely above 5% and even 7.5-8% for Bank of America. Also, most of them are trading at or near at least 7-year lows. I expect the economy and the banks to slowly recover over the next year. What is your analysis? Thanks.

Answer 1

Some bank stocks seem to be trading in value territory. If you have a long-term outlook (> 5 years) and you can stomach some more volatility, allocating some funds to the banks makes sense.

Answer 2

Well if you held a gun to my head and said pick some banking stocks, I guess I'd have to go with BBT - BB&T Corp., JPM - JPMorgan Chase, or WFC - Wells Fargo.  BBT is the only one that pays above a 5% dividend so if that is what you are looking for then check it out.  I might wait one more quarter before jumping into banking stocks.  Either way I think it is a long term hold and most likely will work out for you.  Bank of America scares me because of the CountryWide mess.  I agree with your analysis and I myself might look into some banks but I won't be for at least one quarter and more likely 2 or 3 quarters out.  I don't want to be the hero here.

Answer 3

The banks are borrowing money at high interest rates in order to pay the dividends.  And they are doing this in order to prevent their stock prices from going down even more than they have gone down until now.  The higher management of banks get all kinds of stock option plans as bonuses  and pay.  And it's in their interest to keep their stock prices as high as possible by any means they can, which may include hiding financial losses and giving unrealistically optimistic earnings outlook for the future.

I think banking stocks are overvalued now.   Because banks are sitting on huge amounts of bad debt, which they haven't yet fully acknowledged.  And due to changes in regulation, their profits in the future are likely going to be a lot less than they have been in the past.

It will take a while for investors to realize this.  And when they finally do realize this.  Then the stock prices of banks will go down from their present valuations.

Answer 4

I wouldn't touch them with a ten foot pole right now.  Unfortnuately I didn't follow my own advice a few months ago and I'm sweating it now with Wachovia.  Unless you are playing with money and you can afford to lose it then I wouldn't gamble on anything in this sector right now.

I do agree with the person who said BBT is the best of class here.  It is a conservative bank.  I'm a shareholder and read everything it puts out and I'm not worried about my money.  But that doesn't mean I'm buying more.  Personally I'd just take a wait and see approach.  Revisit this question in about 2 months - most of the storm should be over by then.