Banks That Will Prosper in the New Era

Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Bank stocks have certainly had a tough time the past 5 years or so.  For the most part, investors still look at these companies as poisoned and full of toxic assets, too risky for a long term investment.  Even those who will venture into the banking sector rarely look at these companies as long term investments.  Now that we are well past the lows of 2009, it may be time to reassess and evaluate whether or not these companies make viable buy-and-hold investments anymore. 

Generally, every time there is a major crash in an industry, the companies that survive the crash end up doing extremely well in the long term, to the point of being better off than before the crash.  A great example is the tech crash of 2000.  In the late ‘90’s, every company that could register a domain name was going to be the next big thing.  As the online retail sector got more and more crowded, the bubble burst, and not only did the strongest companies survive, but they were able to gobble up the market share left behind by their fallen competitors.  Amazon.com today is worth more than twice what it was at the peak of the bubble.  The same can be said for eBay as well. 

A similar phenomenon could very well occur in the banking and investment sector.  Through acquiring unfortunate competitors for pennies on the dollar, not to mention the market share left by competitors that simply went out of business, the big banks left standing have a unique opportunity to grow their market share and valuation far beyond what it was even at the peak of the mortgage bubble.  Here are the companies who are particularly well-positioned to do just that over the next decade:

1.)   Bank of America (NYSE: BAC) – The second largest U.S.-based financial holding company, Bank of America has global assets of $2.2 trillion.  In 2008, Bank of America acquired troubled competitors Countrywide Financial, and Merrill Lynch & Co.  The company did issue 600,000 shares of 5.0% fixed rate preferred stock to the U.S. Treasury in connection with the TARP plan, however the increased market share the acquisitions will ultimately provide will more than compensate for their increased indebtedness.  The historically low share price of BAC shares makes for a very interesting entry point for a long-term investment.

2.)   Wells Fargo (NYSE: WFC) – Wells Fargo is the 4th largest bank holding company in the U.S. with assets of $1.34 trillion.  Wells Fargo made one of the savviest acquisitions of the financial crisis by acquiring Wachovia, which has been severely weakened by bad mortgage loans.  Wells Fargo was one of the best performers in the “stress tests” conducted by the government in 2009, and although the company received money from TARP, it repaid the government in full in December 2009.  As the foreclosure crisis winds down, Wells Fargo should be well positioned to capitalize on its increased customer base that resulted from acquiring Wachovia.

3.)   JPMorgan Chase (NYSE: JPM) – Quite possibly the best-positioned of the three banks mentioned, JPMorgan took full advantage of the opportunities presented to them as a survivor or the crash.  In the first major investment bank collapse of the recession, they acquired Bear Stearns in May 2008 for pennies on the dollar.  Then, a few months later in September, they purchased all of the assets of Washington Mutual for only $1.9 billion, an absolute bargain considering that they only had to take on certain liabilities of the failed bank.  JPMorgan currently has approximately $2.3 billion in assets and has operations in 50 countries.

In conclusion, while there will certainly be some volatility in the sector as the foreclosure epidemic plays out and the credit markets continue to thaw, these three banks are extremely well positioned to capture market share and create value for their shareholders.  Just as investors in Amazon and eBay who waited out the tech crash were, holders of these stocks will be handsomely rewarded as the banking sector stabilizes over the years ahead.

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KWMatt82 has no positions in the stocks mentioned above. The Motley Fool owns shares of Bank of America, JPMorgan Chase & Co., and Wells Fargo & Company. Motley Fool newsletter services recommend Wells Fargo & Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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