Will Bank Stocks ever Recover?

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This Week:   Samuel asks, “Will bank stocks ever recover? I hold some shares of C and BAC. I can wait 30 years for them to turn around, it’s no rush, I was just wondering if you think banks are going to recover.”

Yes, they will recover, especially if you own one of the better banks that wasn’t hammered by huge sub-prime write-offs or involved in the CDO speculation circus. The best example is probably JP Morgan Chase, they are eating some mortgage losses, but compared to many of the other major financial institutions, they’re in great shape because they weren’t taking the nutty gambles that their competitors were taking. Banks like this, whose stock prices are down from guilt-by-association will likely recover in less than five years.

Even some of the banks getting battered the worst, such as Citi, will eventually recover but it will take longer. The only stocks you’d have to worry about never recovering are those that are small enough to get into the kind of trouble that Bear Stearns experienced in which they had to either sell out or file bankruptcy because they couldn’t meet their capital requirements.

Why am I confident that the major banks will recover? Because the losses are slowly and painfully working their way through the system, and no recession lasts forever despite the doom and gloom you may see on the news. Eventually, comparisons will start looking pretty good even if the economy isn’t out of the woods. When that happens, the smart first movers will pour money into the market and the next bull rally will be on.

This would probably make more sense with an example… Citi’s comparisons will eventually look good even if they’re still losing money. They lost $10+ Billion in the 4th quarter of 2007 when they moved losses onto the balance sheet, experienced another huge loss in Q1 ‘08 and it sounds like they’re going to take another beating in Q2 ‘08.

Now, fast forward and let’s assume that when Q3 rolls around they lose $1 Billion. If they’ve had multibillion dollar losses for three quarters in a row and the stock has plummeted by about 70% (currently down from $55 June ‘07 to $17 today), a $1 Billion loss actually sounds pretty good by comparison. The stock will start to look like a very good deal to value investors. They’ll jump in and be followed by a lot of institutional investors and you’ll see the stock price head back up toward historical ranges… might take a while to get there though, Samuel, so it’s a good thing you have a long investing time horizon.

If you’re looking for a low-maintenance passive strategy so that you don’t have to sweat this stuff you should probably give Index Investing a look. You can learn more about this and other popular investing strategies in my Complete Guide to Index Investing or my Investing Strategy Review Guides.

I hope some of this information helps you, Samuel. My advice, buy-and-hold-and-hold-and-hold-and-hold…. and then retire wealthy.  I (and I’m sure all of our readers too) wish you the best of luck! Please check back in every now and then to tell us how you’re doing.

Best of luck and please add your thoughts to this post, we’ll all benefit from your questions and insights

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