Buying the FINANCIALS part 1

In a series of analysis. I am researching on whether financials are still worthy contenders in this bullish decade.

Part 1

The BUSINESS OF LENDING

Financials are in the business of lending and providing financial advices. They should do well when there’s huge demand for such services. And usually, high demand occurs in a bullish and fast growing economy.

At our current state of the economy, we are expecting recovery to drive demand.

Financials are part of the recovery play.

The Non-Performing Loans and Assets

It is very important to note the NPLs of the banks as this determine their provisions for losses. Bank of America (BAC) has one of the highest % of NPLs in its portfolio, this is why the bank is trading at a huge discount when compared to other banks as investors are pricing in larger provisions for losses. On the other hand, JPM and Wells Fargo are trading at higher multiples than BAC as they have lower % of NPLs.

The Debt Time Bomb that BANKS hold

Banks hold large amount of BONDS. With the current sovereign crisis, many investors are taking bets that Banks may have to write off the value of some close-to-default bonds (Greek Bonds). This explains why Financials are trading at a heavy discount. The economy is still not stable. We wouldnt know whether Greece is going to default or not.

The burdens of Italy and Spain are even worse.

Part 2: Valuation, Trading Charts