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Five Reasons to Love Bank Stocks

Stocks in this article: WFC MS GS BAC C JPM USB

4. Regulatory Fears Are Overblown Probably the biggest surprise about the regulatory reform legislation that passed the Senate earlier this month was a provision sponsored by Blanche Lincoln (D., Ark.) that would force banks to spin off their derivatives businesses.

Derivatives are a huge profit center for banks like Goldman Sachs, Morgan Stanley and JPMorgan Chase. It is not entirely clear whether the Senate legislation would eliminate their ability to trade, sell and design derivatives altogether, or merely sharply curtail those activities. In any case, the result would be disastrous, and a JPMorgan report Thursday estimates the Lincoln provision would halve the 2011 return on equity for Morgan Stanley and Goldman Sachs.

Even that dire prediction may be too sanguine. One former Federal Reserve official I spoke with fears the provision would make it impossible for banks to hedge their mortgage portfolios, which would create big problems for home lending in the U.S. It also could raise questions about the ability of multinational corporations in a wide range of industries to hedge against commodity and currency risks.

Many of these fears are, to an extent, priced into stocks, and into bank stocks in particular. If the Lincoln provision becomes law, the stocks will trade down further, but if the impact is really so dire as to shut off home lending, or keep McDonald's (MCD) from doing business around the globe, Congress will be forced to fix it. More likely, though, is that the provision never becomes law.

The White House downplays it and House Financial Services Committee Chairman Barney Frank (D., Mass.) doesn't seem to like it much. Fed Chairman Ben Bernanke has also opposed it. Lawmakers are essentially just working out a way to kill it without seeming like they are sucking up to the banks. They will find it eventually, and when they do, bank stocks will rally.

3. Low Tax Bills Ahead

As the accompanying graphic shows, many banks won't be paying taxes for a year or, in some cases, many years. That is especially true for banks that lost a lot of money during the crisis, which is to say, nearly every bank! All the potential write-offs mean yesterday's losers reap big savings when they become profitable again, and few industries lost more money than banking in recent years.

Bank Analysis
Five Bank Stock Bargains

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