INSIGHTS

On January 07, 2011

I Want to Be a Bank!

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Many of you who follow my musings know that I have been bullish on banks ever since the government started the TARP program. We were early to the party for sure, but we have been well rewarded to put up with the consternation involved around these names. In fact, the banks have provided Uncle Sam and the U.S. taxpayer with the largest and most profitable returns ever as they have moved to repay TARP funds and exit the program. The profits are now in the billions. Except for the funding of the bankrupt auto companies and AIG, the TARP investment in the banks is a homerun! I am always amazed that most folks have not figured this out. They also fail to see the real value in owning debt and equity of banks. We continue to see outsized opportunity.

Banks are operating in a state of nirvana. Their non-performing assets continue to minimize with the economic recovery and we are seeing growth in quality loan demand. With the steep yield curve and support from the FED, banks are earning near-record amounts of spread on their loan portfolios. The recent settlement with Fannie Mae and Freddie Mac by Bank of America significantly lowered the bank’s exposure to mortgage put-backs and now will be the model that other banks reach a settlement. This is huge for the banks with mortgage origination exposure. Finally, the commercial real estate crash has never materialized. We see continued and steady momentum in the commercial markets with adequate access to capital.

Which banks should you concentrate on? The list is a long one. We see opportunity in money center banks like Citigroup (C) and Bank of American (BAC) with world-class franchises. These companies have levered upside to an economic recovery. Bank of America’s purchase of Merrill Lynch is providing a continued payoff. Even the Countrywide purchase is looking much better. Citigroup is levered to the global growth story. We also like regional banks such as Zions, Key Bank and Regions Financial. We continue to find significant value in the debt, preferred and common shares of these companies. We understand there is still risk in buying banks but we think the risks are much less than the markets are assigning. Many market pundits continue to maintain a negative outlook regarding these companies; however, we don’t see it that way. We see the FED as a very big supporter of these banks as they are vital to our economic health.

We would urge our readers to take a closer look at banks. Their businesses are getting better and should be good places to invest for 2011 and beyond. Nirvana is good! I want to be a bank!

This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the disclosures webpage for additional risk information. For additional commentary or financial resources, please visit www.aamlive.com/blog.