Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Making the Bull Case for Financials Courtesy of QE3

By

The biggest impact of QE3 on the banks is the promised stability it offers the housing market. This translates to improved stability for banks that are holding US mortgages.

PrintPRINT
The financial services sector has been sitting in its time-out chair for at least four years now. The sector has really never recovered to the pre-2008 financial crisis levels. Any optimism that it might recover to those levels soon is probably misplaced. However, the sector has some nice room to still run over the long haul, and I'll make that case below.

We know the two biggest reasons financial services stocks are still so depressed compared to 2007 levels: (1) given the new rules that they are forced to play by, they will not get back to their pre-2008 earnings levels any time soon, and (2) many banks continue to carry "problem" assets on their books that make valuation difficult to gauge.

Let's review these two areas before we make our bull case for financials. Wall Street's pre-2008 earnings levels are a distant memory. These firms will never again be allowed to use the leverage they used or make the risky bets with capital that they once made. And rightly so, as we saw the outcome of risk investment capital gone wild during the financial crisis.

As a result, the earnings potential of these firms is now capped. On top of that, with these firms taking less risk, they have lower reward potential (read: lower reward potential as lower growth potential). With lower growth potential, the industry will see a lower PE ratio. That is just a basic tenet of investing!

Regarding the second problem for financial services, the largest banks still carry many toxic assets on their books – mostly in the form of US mortgages that have been packaged into fixed income securities. These firms have had to raise capital to buttress their balance sheets because of the losses on these toxic assets. It is difficult for investors to put a size on the problem on the books of these largest banks because the insight to the exact holdings is unclear. This uncertainty just continues to weigh down on the valuations of many of the largest banks.

Despite these continued challenges for financial services companies, I can see a light at the end of the tunnel -- and it is not a train!

QE3 is now officially announced by the Fed. QE3 will keep interest rates for mortgages low for the foreseeable future. In fact, this is just a general continuation of the trend to keep interest rates low across the board.

At first glance, lower interest rates seem like a problem for financial services companies. Lower interest rates promote tighter and lower Net Interest Margins (or NIM). NIM is the primary source of revenue for most financial services companies. Think of NIM as the business model of loaning money-borrowers at one rate with your source for loaning that money at a lower rate.
< Previous
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
PrintPRINT

Busy? Subscribe to our free newsletter!

Submit
 

WHAT'S POPULAR IN THE VILLE