What The Best Bank Stocks Have In Common

In 2017, Warren Buffett told CNBC that he will own Bank of America stock for a “long, long, long time.” Bank of America is regarded as one of the best bank stocks in the market. But what is it that makes bank stocks so attractive to investors?

Banks are essential to the economy. Without them, you wouldn’t be able to borrow money, have a savings account, or take out money from the ATM.

best bank stocks

Source:  Federal Reserve Bank of San Francisco 

How Do The Best Bank Stocks Make Money?

The best bank stocks primarily make money from net interest income. Banks  collect interest from its loans and other interest-earnings assets. In addition, the banks borrow money from depositors and then invest those funds, collecting a greater yield.

In addition, the best bank stocks have multiple revenue streams. For example, they also make money from investment and brokerage services.

And let’s not forget those pesky service charges.

Some of the best bank stocks like JP Morgan, make money from trading and investment banking.

Banks provide so many functions to the economy its no surprise to hear legendary investors like Warren Buffett speak so highly on them being long term investments.

The 3 Best Bank Stocks

JP Morgan Chase & Co (NYSE: JPM)- Founded in 1799, this financial giant operates its business through four segments. They include:  consumer and community banking, corporate and investment bank, commercial banking, wealth and asset management.

A member of the S&P 500 and the Dow Jones Industrial Average. The firm has a market cap that surpasses $400B. It offers investors an annual dividend of $2.24.

Some of its largest investors include: Vanguard Group, Blackrock, State Street, and Bank of America.

Bank Of America (NYSE: BAC)- Founded in 1874, the firm operates through

four segments. It includes:  consumer banking, global wealth and investment management, global banking, and global markets.

A member of the S&P 500, the company has a market cap that exceeds $300B. It offers investors annual dividend of $0.48 per share.

Some of its largest investors include:  Berkshire Hathaway, Vanguard Group, Blackrock and State Street Corp.

Citigroup Inc. (NYSE: C)- Founded in 1812, the firm operates through two segments: Citicorp and Citi Holdings.

Citicorp offers traditional banking services to people through retail banking, commercial banking, and other retail related services. In addition, it offers credit lending, and investment services through local branches.  Furthermore, the segment provides investment banking, trading, prime brokerage, research, corporate lending, and other investment banking services.

The Citi Holdings segment provides consumer loans, portfolio of securities, loans and other assets.

A member of the S&P 500, the firm has a market cap that exceeds $200B. It offers investors an annual dividend of $1.28 per share.

Some of its largest investors include Blackrock, Vanguard Group, and State Street Corp.

Characteristics Of The Best Bank Stocks

Valuation: The price to earnings ratio is generally in the mid to high teens.

Financial: They offer a dividend to investors. In addition, the best bank stocks have a positive return on equity, and a low debt to equity ratio.

Investors: They are primarily owned by institutions like hedge funds and mutual funds.

Trading: They are actively traded, allowing traders and investors to put as much size as they want while getting seamless execution.

What Moves Bank Stocks

There are several catalysts in the banking sector.  They include: treasury auctions, the consumer price index, FOMC interest rate decisions, mortgage applications, consumer credit, GDP, and consumer sentiment just to name a few.

Because the banking sector is so tied to the economy, nearly every major economic release has the potential to impact the banks.

That said, during the financial crisis banks under performed like most of the market. However, several market pundits blamed the banks for causing the financial crisis. They believed that the banks got sloppy, giving out bad loans that ultimately lead

Simple Way To Gain Exposure To The Best Bank Stocks

ETFs make it easy for an investor to gain exposure to certain sectors of the market. For example, the Financial Select Sector SPDR ETF (NYSE: XLF) invests in a basket of bank stocks.

Some of its largest holdings include: JP Morgan Chase, Bank of America, Wells Fargo, and Citigroup. It also invests in other financial companies like Goldman Sachs and Berkshire Hathaway.

The fund’s objective is put together a basket of stocks that represents the financial sector in the S&P 500.

The ETF offers traders an opportunity to gain diversification among the financial sector.

Bottom Line

During the 2009 financial crisis banks came under a lot of scrutiny. Some of their business practices included using to0 much leverage on derivative products that ultimately lead to the financial markets collapsing.

Given how important they are, many of the best bank stocks received a government bailout. The banking industry has gotten several rounds of restructuring and going back to more traditional services.

Long term investors like Warren Buffett can find comfort in owning bank stocks. Despite the attention cryptocurrencies and blockchain have gotten, we are still a long way from replacing the banking sector.

Unlike some sectors like technology, it’s rare to see a young up and coming company make a splash in the banking sector. For example, Bank of America, JP Morgan, and Citigroup were all founded over a century ago.

Sticking to large cap names in the sector is the safer play for the long term. However, with any type of investment, its important to do your own due diligence.

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