Bank Stocks: A Year in Review

NEW YORK ( TheStreet) -- With the fiscal cliff, debt ceiling, sequester and government shutdown making the list of agenda topics that remained unresolved heading into 2013, I had my doubts that this would have been a good year for banks stocks. And when you consider the strain placed on the entire sector due to a chronically low interest rate environment, there were plenty of reasons to bet against last year's top performers.

With each of the "big four" banking giants posting gains of 30% or better, 2013 proved how resilient investors were in separating the constant noise that drowned the industry and instead placed their attention on the bank's actual balance sheets -- many of which showed drastic improvements each quarter.

For this reason (among others) I never believed that either JPMorgan Chase (JPM) and Citigroup (C), which are still working to overcome a few embarrassments, were in any real prolonged danger. And this is even with some disappointing results, like in the April quarter. It's true that interest rates took a toll on revenue, but management demonstrated throughout the course of the year that both banks possessed strong businesses, especially in investment banking.

In the case of JPMorgan, and even more so for Wells Fargo (WFC), their respective mortgage and retail banking businesses led the way. This is despite early sluggishness in loan demand. What was also impressive this year about Wells Fargo was the fact that management never made excuses. Instead, they've consistently raised the bar - adding pressure on their own ability to perform better. With year-to-date gains of 34%, which bested both Citigroup and JPMorgan, investors have responded.

However, with almost 36% gains, the big winner -- albeit by a slight margin -- was Bank of America (BAC). Given the degree to which BofA has been vilified over the past couple of years, including absorbing more blame than it deserved for the credit crisis, I don't believe anyone saw this one expected this level of outperformance. Nevertheless, I have always believed that these shares have outperformed the company's own results. Investors disagreed.

I'm not saying BofA's turnaround was unimpressive. In fact, I've said on more than one occasion that the pace of the bank's recovery was faster than its decline. Nor is this meant to discredit what current management, especially given how quickly they've moved to repair legacy issues left by previous leadership. But as with Citigroup, I do believe that BofA's strong 2013 performance was a "natural effect" of the depths the bank had reached in years past.

For Citigroup, although its 31% gains trailed the other three giants, it's hard to call the bank a "laggard." Throughout 2013, I was impressed with how management figured out ways to create shareholder value by focusing on things like credit-cost reduction and fee income growth. Not to mention, strong improvements in average earning assets that contributed to year-over-year growth in net interest income.

As with BofA, Citigroup is not out of the woods yet. And I believe the challenges that still remain in consumer banking (its largest business) mean that there is still plenty of work left to do. But Citigroup has navigated is this tough environment as well as anyone expected when the year began -- helped (in part) by management's diligent operating expenses control.

As well as these large global giants performed, 2013 was also the rise of the smaller regional banks like Huntington Bancshares (HBAN) and Fifth Third Bank (FITB), which posted gains of 51% and 37%, respectively. In fact, the entire super regional banks outperformed the larger global industry two-to-one.

Investors who were more enamored with growth likely never considered names like U.S. Bancorp (USB) or BB&T (BBT), especially in what proved to be a highly competitive banking market where everyone scrounged for loan volume. But investors that valued consistent operational performances and an element of safety knew exactly where to look. And their specialties in retail banking certainly made a worthwhile difference.

With virtually every bank outperforming 3-year and 5-year averages, it's hard to disagree that 2013 was the year of financial stocks. With that, normally this is the part where I could caution investors about getting their hopes up and expect this trend will continue. But given that the Fed just announced that it will begin tapering off its bond buying program in early 2014, which should send interest rates higher, this throws a wrench in my bearish thesis.

At the time of publication, the author held no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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