U.S. banks have been the “good bad team” of the stock market in 2013.


For those who don’t follow sports, the term refers to a team that is capable of beating inferior rivals but can’t really prevail against stronger opposition. (Topical examples include the Kansas City Chiefs of the National Football League and Manchester United in English soccer.)


Last year, financial stocks beat investors’ fairly modest expectations and surged even more than the overall market, helped by an improving economic outlook and more investment-banking activity. It was the second consecutive year in which bank shares have done better than the S&P 500.


Will they three-peat? Investors small and large seem to think so, judging by cash flows into financial-stock funds and the optimism of large money managers.


A good round of fourth-quarter earnings, which begin next week for U.S. lenders, could give further impetus to the “bank-is-beautiful” theme.


But before we all buy football shirts with “Dimon” and “Blankfein” on the back and start tailgating outside Bank of America Corp.’s BAC -0.73%Bank of America Corp.U.S.: NYSE $17.34 -0.13-0.73% March 11, 2014 11:56 am Volume (Delayed 15m) : 32.30M P/E Ratio 18.47Market Cap $184.63 Billion Dividend Yield 0.23% Rev. per Employee $409,02903/11/14 BofA’s Head of Global Prime Br…03/11/14 Bank of America Merrill Lynch …03/08/14 Bank of America CEO Brian Moyn…More quote details and news »BAC inYour ValueYour Change Short position headquarters, it may be helpful to reflect on the past five years in the U.S. financial industry.


The short story is that, after the ruinous 2008-2009 period, banks cut costs, trimmed balance sheets and got rid of “hobbies” that didn’t fit with their main businesses. The results have been substantial: The KBW Bank Index, a broad measure of the sector’s shares, has more than tripled since its postcrisis nadir. Large banks like Goldman Sachs Group Inc. GS -0.92%Goldman Sachs Group Inc.U.S.: NYSE $171.92 -1.59-0.92% March 11, 2014 11:56 am Volume (Delayed 15m) : 1.12M P/E Ratio 10.53Market Cap $78.90 Billion Dividend Yield 1.28% Rev. per Employee $1,201,64003/10/14 High-Speed Trading Firm Virtu …03/09/14 RBC Ruling Strikes a Blow to D…03/07/14 Goldman Sachs Partners Cut The…More quote details and news »GS inYour ValueYour Change Short position and J.P. Morgan Chase JPM -0.88%JPMorgan Chase & Co.U.S.: NYSE $58.68 -0.52-0.88% March 11, 2014 11:56 am Volume (Delayed 15m) : 5.37M P/E Ratio 13.46Market Cap $224.18 Billion Dividend Yield 2.59% Rev. per Employee $410,41503/10/14 High-Speed Trading Firm Virtu …03/07/14 Medical Services Company M*Mod…03/07/14 J.P. Morgan Whistleblower Gets…More quote details and news »JPM inYour ValueYour Change Short position & Co. are enjoying valuations unseen in years.


However, that success hasn’t been accompanied by a significant increase in either top-line revenues or operating profits. In other words, banks have largely grown by cutting expenses and becoming more efficient, rather than by doing their job of lending to businesses and consumers, helping companies with deals and enabling investors to trade.


Take the performance of Wells Fargo WFC -0.58%Wells Fargo & Co.U.S.: NYSE $47.87 -0.28-0.58% March 11, 2014 11:56 am Volume (Delayed 15m) : 4.62M P/E Ratio 12.15Market Cap $253.36 Billion Dividend Yield 2.50% Rev. per Employee $337,36103/07/14 Corporate Economists Are Hot A…03/06/14 Wells Fargo, HSBC Agree to Ref…03/05/14 New York Regulator Benjamin La…More quote details and news »WFC inYour ValueYour Change Short position & Co. since 2010. The shares are up nearly 70% but revenues and operating income are virtually flat, according to estimates of this year’s earnings by analysts at Keefe Bruyette & Woods.


For Wells and others, the hard work begins now: sustaining gains in both share prices and the bottom line.


Bank bulls point to two factors: the acceleration of U.S. economic growth and a “steeper yield curve”—a rise in long-term rates while short-term rates stay low. These elements should enable banks to extend more loans to more financially sound borrowers while at the same time charging more for the money. (Banks borrow at short-term rates and lend at longer-term rates.)


“Commercial banks will be in an ideal position in 2014,” says Davide Serra, the founder of Algebris Investments (UK) LLP, a $1.6 billion asset-management firm focused on financial companies around the world. “Better credit quality, coupled with a steeper yield curve and a continued focus on costs should lead to some excellent results.”


As for investment banks, experts such as Brad Hintz at Bernstein Research argue that despite an ongoing regulatory onslaught, a recovery in capital markets should boost revenues from equity and debt issuance, and maybe even the long-dormant takeover market.


Now for the bad news: The U.S. economy is growing, but not fast enough to spark a sharp increase in demand for loans. “Loan growth may pick up slightly,” Citigroup Inc. C -0.85%Citigroup Inc.U.S.: NYSE $49.15 -0.42-0.85% March 11, 2014 11:56 am Volume (Delayed 15m) : 9.23M P/E Ratio 11.25Market Cap $150.52 Billion Dividend Yield 0.08% Rev. per Employee $373,49803/10/14 Citi Taps Rajat Madhok for Key…03/09/14 HEARD ON THE STREET: The Taxin…03/06/14 Citibank N.A. Operating Chief …More quote details and news »C inYour ValueYour Change Short position analyst Keith Horowitz wrote to clients recently. “But we don’t see a catalyst for a large acceleration…as the slow recovery of the U.S. economy continues.”


And while higher longer-term rates help bank margins, they are already curbing one of the main profit engines: mortgage refinancing activity.


More important, banks are coming close to the bottom of the barrel when it comes to cutting expenses and releasing reserves set aside for bad loans—two big drivers of recent performance. Christopher Mutascio, a KBW analyst, expects the pace of reserve releases, an accounting maneuver that enables banks to add to profits any money set aside for bad loans when credit quality improves, to slow down this year for all the 11 commercial banks he covers.


His conclusion? “We believe outperforming the broader market in 2014 will be tough for the large banks.”


As with many “good bad teams,” the experts are divided on banks going into a new season. Investors should tune out the noise and ask the fundamental question: Can banks increase profits without the crutches of cost control and balance-sheet tweaking?


The answer could make a difference between another bout of Chicago Cubs-like futility and a miracle on ICE. (As in IntercontinentalExchange Inc., the owner of the New York Stock Exchange, where most banks are listed.)



Risk Diversification-
the ability to spread out investments within a portfolio to minimize risk, or loss of assets


Economies of Scale-
to minimize operating costs, financial institutions can move operations out of the country


new product innovations can make great income especially if sold overseas


Funds Source-
gives the opportunity to locate the cheapest and most available sources of funds, also reducing risk of declining credit ratings in a market


Customer Relationships-
Expanding customer service overseas will not only assist the FI but encourages foreign investment

Regulatory Avoidance- FI are restricted and high taxed in the US-and less restricted and lower taxed in other countries while increasing profits



- collegepaperslab.com
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