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Five Reasons to Love Bank Stocks

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

Looking at a term called net deferred tax assets is a good way to figure out how much in losses and other items companies can apply toward reducing their tax bills in the future, according to corporate tax consultant Robert Willens. Though banks already count this number as an asset that is reflected in book value, Willens nonetheless believes the issue is poorly understood and may not be fully reflected in companies' share prices.

Not reflected in book value is something called a valuation allowance. That refers to losses banks aren't counting as an asset because accounting rules require them to demonstrate a better than 50% probability they will be able to earn enough to use the loss as a write-off. If earnings prove stronger than expected, banks can release capital they have to hold against that valuation allowance, leading to a rise in book value.

2. Worries About Europe Are Excessive

Fiscally stronger European countries like Germany have made a major commitment to support weaker ones like Greece. This is not a small thing, and it will go a long way to providing stability on the continent. Longer term, you may see some weaker countries drop out of the euro, but that's at least a couple of years off.

For all their size, even the largest U.S. banks like Wells Fargo, JPMorgan and Bank of America have essentially no European exposure when it comes to retail businesses, like credit cards or mortgage lending. Wealth management and business lending is minuscule. Even investment banking and business lending operations pale in comparison to the size of their counterparts in the U.S. and other parts of the world. Even Citigroup, traditionally the most global of large U.S. banks, is far from a major player in Europe.

1. Everyone Is Selling

Though bank stocks, like the rest of the market, have showed some signs of life this week, fear has clearly injected itself into the market. The mantra of Sage of Omaha Warren Buffett that it pays to be greedy when others are fearful and fearful when others are greedy proves itself time and again. The trick, of course, is knowing whether people are going to get more fearful before they start to get greedy again. You can never know for sure, which is why you simply have to add risk compared to where you were when the market was higher a month ago.

The SPDR KBW Bank ETF has roughly matched the Dow Jones Industrial Average in the selloff of the past month, but it has sharply outperformed the Dow since markets rebounded off their lows in March 2009. When the markets resume their climb, bank stocks are sure to outperform.

Bank Analysis
Five Bank Stock Bargains

-- Written by Dan Freed in New York.

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