The banking segment is the sector par excellence of equities since its presence captures the attention of a good part of the small and medium investors. With great activity in the exchange of securities in all trading sessions and that determine the real evolution of the selective index of the Spanish stock market. With values of the importance of BBVA, Santander, Sabadell or Bankinter that have depreciated enormously in recent months as a result of the expansion of the coronavirus. Even so, it cannot be forgotten that many of them are integrated like the blue chips of the financial markets and with a large volume of contracts. Like they are characterized by being very liquid values that allow entering and exiting their positions with some ease.
The banking sector is also characterized by being more aggressive companies by a wide margin. Markets expect regulators to lower what they consider to be a high level of interventionism in the sector, a relaxation in the different balance sheet ratios. Being one of the factors that have generated that their values have lost their valuation in the equity markets for a few years. While since the coronavirus spread throughout the world there has been a new scenario in which the banks, which have already sacrificed the dividends this year, want certain guarantees that the loans they grant will collect them. Given the risk of defaults that has been created in this new general context.
On the other hand, their price has collapsed to the point of presenting very little imaginable prices until a few months ago. Where some of them are below the euro unit and with little prospect of exceeding these levels in prices. With a very important reduction in the small and medium investors who have taken their positions in the equity markets of our country. Because, in addition, the sector is in a clearly downward trend, and what is worse, at all terms: short, medium and long. Through a current selling seldom seen in the last sessions on the stock market and that has led to them not being an object in the operations of stock market users.
Banks the worst sector in the Ibex 35
In any case, there is one thing for sure and that is that the financial sector is the worst in the year in regards to the selective index of equities in Spain, the Ibex 35. With decreases above 35% and in some cases even more than 50% have been left behind. In other words, it has not been a good deal for all small and medium investors. Where they have lost so far a good part of the savings invested in these financial groups. Above other relevant sectors, such as construction, electricity or new technologies. From this scenario, there is no other solution but to wait and see how these listed companies evolve so that they may be able to be bought with more adjusted and competitive prices than until now.
While on the other hand, it cannot be forgotten that these stocks carry very high risks precisely thanks to their enormous volatility and that they are at the forefront of all the stock market sectors. With a large difference between its maximum and minimum prices and that in many cases can lead to levels around 5% and in some moments with more intensity. This is a highly discouraged situation for small and medium-sized investors with a more defensive or conservative profile who cannot allow this kind of fluctuation in the equity markets. While on the contrary, it is much more suitable for traders who can make profitable their savings in a very short space of time. In what is a change in the habits of users of this class of financial products.
Cyclical values
This class of listed companies is another of the big losers this year as their business lines have plummeted with great intensity. With annual depreciations around 45%, which is saying a lot for the first half of the year. But we cannot forget that this class of securities is characterized above all because they perform better in growth periods and lower than the rest in recessive periods. And therefore it is strictly following this rule that is always observed in the equity markets. And therefore there will be no choice but to avoid their positions at this time. Because we may have some other negative surprises from now on.
While on the other hand, it must be emphasized that cyclical securities tend to trade with greater volatility than the rest. Not surprisingly, this is another of its most pronounced identity signs and that you have to analyze to know what the intensity of its falls may be and choose not to enter its positions on the stock market. From this point of view, there is no choice but to abstain in decision-making, at least as regards the shortest term. In this sense, it must be remembered that the stronger it is, the stronger the economy becomes. But as the sector weakens, as evidenced by the events leading up to this moment, the situation can become very difficult for investors.
Wait at least a while
The best investment strategy that investors have at the moment is to wait, wait and wait. They have no choice if they really want to protect their positions in this class of securities. Because any slippage can cause them to leave a lot of euros along the way and therefore they must act to face this complex situation that is being presented to them in these complex months for the equity markets and especially for the securities of the sector. banking. In addition there are no exceptions of any since the technical aspect is disastrous for all of them and therefore does not allow safe haven values within the same stock market.
On the other hand, it is also necessary to assess the fact that this business segment suffers from great weaknesses. They are not new, but on the contrary they have been dragging them for some years and this is one of the reasons why their value on the stock market has plummeted in the last two years. It is preferable to wait for a few to start buying shares in order to avoid unwanted situations for a large part of investors. Not surprisingly, at this time volatility has increased and can cause nerves to surface in an exponential way to the circumstances we are going through at this time of our lives. Where caution must prevail over other more technical considerations.
What is value investing?
Value investing is a strategy used by people who choose stocks that appear to be trading for less than their intrinsic or book value. Value investors look for stocks in which the market price does not fully reflect the future cash flows of a business. These investors basically believe that the stocks they choose are undervalued by the market. They often aggressively buy stocks at the same time as others sell them, during times of bad news, poor performance, or weak economic conditions. But when most people chase stocks that gallop higher, value investors do the opposite: They sell.
Value investors focus on long-term rather than short-term goals. Distress in the broader market or on an individual equity base is what creates opportunities for value investors to buy at attractive discounts. The banking sector is quite sensitive to the business cycle, making it susceptible to price and valuation extremes that attract value investors.
The banking sector
The banking or financial sector comprises companies that provide financial services to consumers. This includes retail banks, insurance companies, and investment services companies. This sector has a great impact on the economy. The stronger it is, the stronger the economy becomes. But as the sector weakens, as evidenced by the events leading up to the Great Depression, the economy is beginning to follow suit. Therefore, a healthy and stable economy requires a strong financial and banking sector.
Many of the stocks in this sector pay dividends, which many value investors believe is a good sign of the quality of a company. The longer the dividend history, the better for the investor, as it demonstrates a good track record of success. It also shows that the company has a history of providing investors with a share of the profits.
Short-term investment vs. long term
The perspective of a value investor can best be understood through the description of many of the most experienced investors in the stock market as a short-term voting machine, but a long-term weighing machine. The meaning of this metaphor is that in the short term, stock prices are determined by the emotions and opinions of market participants. But in the long run, the price is driven by the actual performance of the company.
Graham is considered the father of value investing, emphasizing a focus on the long-term fundamentals of a stock. Given that bank stocks are perhaps the most susceptible to these short-term emotional forces, given the leverage and nature of the business, it is only natural that value investors are attracted to this sector.
Value investors look for stocks with a low price-to-earnings (P / E) ratio. Sometimes if a business is really in trouble, it may be losing money, making this measure less helpful than sales or gross margins. Another measure of value is the price-earnings ratio (P / B). The book value of the company reflects the book value of the company after accounting for all types of liabilities.
Hot stocks to face the stock market in the summer
This will undoubtedly be an atypical summer for small and medium investors due to the current circumstances that have arisen.
Banks can seem like pretty complicated businesses, and in many ways they are. However, the basic ideas behind the banking industry and how these businesses make their money are easy to understand. With that in mind, here is an overview of the different types of banks, some important metrics investors should know, and three great beginner banking stocks to keep on your radar.
The 3 categories of banking businesses
Commercial banks: These are banks that provide services to consumers and businesses, such as checking and savings accounts, auto loans, mortgages, certificates of deposit, and more. The main way that a commercial bank makes its money is by borrowing money at a relatively low interest rate and lending it to customers at a higher rate. While commercial banks make most of their money from interest income, many also collect significant income from loan origination fees, ATM surcharges, and account maintenance fees.
Investment banks: These banks provide investment services for institutional clients and people with high purchasing power. Investment banks are companies that help other companies go public through initial public offerings, issue debt securities and advise on mergers and acquisitions, and earn commissions for all of these things. Investment banks also often make money from trading stocks, fixed income securities, currencies, and commodities. They also tend to have wealth management businesses and often have substantial investment portfolios of their own.
Universal banks: A universal bank is one that has commercial and investment banking operations. Most of the big American banks are universal banks. While commercial banks get most of their earnings from interest income and investment banks rely primarily on fee income, universal banks enjoy a good mix of both.
Obviously these are simplified definitions. Banks have many other ways of generating income. For example, many banks offer safe deposit boxes to rent to their customers, and some make money through partnerships with third-party companies. However, deep down, these are the main ways that banks make their money.
3 Top Banking Actions to Put on Your Radar in 2020
Hundreds of banks trade on major US exchanges, and they come in various sizes, geographic locations, and foci. While there are some great options in the investible universe, here are three beginner banking stocks that could offer great returns for years to come.
- Bank of America (NYSE: BAC)
- JPMorgan Chase (NYSE: JPM)
- US Bancorp (NYSE: USB)
Important Metrics for Bank Stock Investors
If you are looking to invest in individual bank stocks, here are some metrics you might want to add to your toolkit:
Price to Book (P / B) Value: A great valuation metric to use with bank stocks, price-to-book value, or P / B, shows how much a bank is trading relative to the net worth of your assets. It can be used in combination with the profitability metrics discussed below to give a general idea of how cheap or expensive a bank's stocks are.
Return on Equity (ROE): The first of the two common profitability measures used with bank stocks, return on equity is a bank's profit expressed as a percentage of its shareholders' equity. The higher the better; 10% or more is generally considered sufficient.
Return on Assets (ROA): It is the profit of a bank as a percentage of the assets on its balance sheet. For example, if a bank made a profit of $ 1.000 billion in 2020 and had $ 100.000 billion in assets, its return on assets would be 1%. Investors generally want to see a ROA of 1% or more.
Efficiency ratio: A bank's efficiency ratio is a percentage that tells investors how much the bank spent to generate its income. For example, a 60% efficiency ratio means that a bank spent $ 60 for every $ 100 of revenue it generated. The efficiency ratio is obtained by dividing the interest-free expenses (operating costs) by the net income, and lower is better.