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| Date: Saturday 22nd 2008f November 2008 04:25:13 AM |
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A Glance at Bank Stocks - 09/15/2005 |
| By: Hari Wibowo |
| Banking industry is mainly a cyclical industry. While some regional and multinational banks have tried to diversify beyond traditional lending, banks are still mightily dependent upon the direction of interest rate. When rate rises, banks need to hedge their net interest margin in order to be profitable. Net interest margin is the difference on the interest that the bank charges to borrowers and the interest rate that it gives to depositors. |
| When interest margin narrows, bank made less money from traditional lending and vice versa. Other things to consider when looking at bank stock include: asset efficiency, profitability, deposit and loan growth, earning per share etc. Enough about that. It takes you weeks to learn all that. Here is a shortcut for you. |
| When interest rate rises, bank makes less. When rate drops, bank makes more. Our task is to find banks that depend heavily on traditional lending and invest in them when interest rate reaches its peak. This is when earning per share bottoms out. |
| The last time I checked, we are in a rising rate environment. Sure, things look bad right now. I know it is too early to speculate on when rate will drop right now. But when it drops, bank that depends heavily on traditional lending will get the better boost in earning. For example: Flagstar Bancorp Inc. (FBC) earned $ 254 M in 2003 and $ 144 M in 2004. This translates into earning of $ 4.06 and $ 2.30 per share respectively. Analysts are expecting a yet lower earning per share (EPS) of $ 1.75 for fiscal year 2005. |
| If and when rate reaches its peak, that's when we should buy bank stocks. This is when the bank's earning reaches bottom. The problem is finding the exact time of the peak. In my opinion, the peak is still at least six months away, probably more. Current federal fund rate is at 3.50 percent, which is just about what the average inflation rate is. |
| One sweet thing about investing in bank stock; they offer a generous dividend. Currently Flagstar Bancorp (FBC) is offering a 5.70% dividend yield, Bank of America (BAC) : 4.77%, Wells Fargo (WFC) : 3.50 %, Citigroup Inc (C) : 3.90% and Washington Mutual (WM) : 4.60%. Find when their earnings will bottom. You will be rewarded. |
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| Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Flagstar Bancorp Inc..(FBC) or other securities. |
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