Pocket Some Bank Shots

 | Apr 10, 2014 | 5:30 PM EDT  | Comments
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Stock quotes in this article:

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wfc

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bac

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gs

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gs

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Similar to many people, I still have a bad taste in my mouth about the large, institutional U.S. banks due to the events of 2007-2008. Coming from somebody who made a living in the dealing room of a large financial institution for 20 years, particularly in the famously risky and unethical world of foreign exchange, this may seem hypocritical. In fact, when I put it that way, it probably is, but I can't help the way I feel. I may not like the banks, but as JPMorgan Chase (JPM) and Wells Fargo (WFC) get ready to kick off bank earnings tomorrow, I do like their stocks.

Don't get me wrong, the banks weren't the only cause of the global credit crisis -- some would say not even the main one -- but their seemingly blasé attitude toward risk and their woefully inadequate provisions for the day when that risk backfired suggested an arrogance and sense of invincibility that is, to say the least, unappealing. That vague feeling of distaste, however, is exactly the reason why investors should own stock in at least a couple of the major U.S. banks. JPMorgan Chase, Bank of America (BAC), Goldman Sachs (GS), Wells Fargo and, to a lesser extent, Citigroup (C) not only survived those events but have since thrived when judged by the only metric that matters to a corporation -- profitability.

There is talk, for example, of JPMorgan Chase reporting a disappointing quarter, with profits of only around $5.45 billion. This would be a drop compared to last year, but what it does show is that these mega banks are cash-flow-producing machines, even during a disappointing quarter. The attempts of regulators to ensure that the crisis isn't repeated have meant that much of that cash has been utilized to increase capital at the big banks. The resulting reduction in available leverage will hurt profitability to some extent, but an increased focus on the more boring but safer business of lending will be welcomed by many.

As the banks report over the next couple of weeks, the focus will likely be on any drop in trading profit, but if that is made up for in other areas, the long-term prospects for JPMorgan Chase, Wells Fargo, Bank of America et al. will only look stronger.

What is emerging from the wreckage of the recession is a group of banks that has been forced to show a little more prudence and had their ability to grow restricted but that are still making billions of dollars every quarter. You may feel that this is in some way unfair, but their ability to generate profit is undeniable. Don't let your outrage blind you to the fact that the large financial institutions are still some of the most profitable companies extant.

As first-quarter earnings are released, I will certainly be looking at them that way and will be ready to buy any and all of them if a temporary reduction in trading profit causes their stocks to fall.

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