I Would Still Avoid U.S. Bank Stocks at All Costs

Recently, U.S. banks have announced that they are planning on raising dividend payouts in 2011.

It surely looks like these banks are finally setting their houses in order. However, my equity investing experience in the last four years has taught me that things are not always as they appear to be.

The fact is that the banks still have too much toxic assets on their balance sheets (in trillions of dollars in mortgages and mortgage backed securities) and no one knows how much they are actually worth if the banks were to sell them in the market today. Even if they have an idea of the fair value, they are better off not disclosing it to the public. Thanks to the FASB’s relaxed rule on mark to market, the banks have been able to delay reporting the losses on their books so far.

In addition, the new Basel III international capital standards will be imposed on banks in a few years. The new standards will demand that the banks are more adequately capitalized to avoid another systematic crisis that the financial sector experienced in 2008. According to the Financial Times, U.S. banks will be forced to raise $100 billion to meet the new capitalization requirement.

To add insult to the injury, banks now face litigations that could force them to mark down their assets at the same time they will have to buy back tens of billions of dollars of non-performing mortgages they originated and securitized. After lending money to home buyers, banks securitized their mortgage loans. Now investors that purchased these securitized loans argue that the mortgages were not what they were represented to be when the banks were selling these securities to the investors. The Federal Reserve is very concerned about the size of this put-back problem that it has embarked on internal investigations. 

These large U.S. banks have so far been well supported by the Federal Reserve through so-called Quantitative Easing. And it is the very reason why I believe the Fed will announce more rounds of quantitative easing or equivalents to shore up the banks’ balance sheets. Had there been no liquidity injections by the FED and the U.S. government, these major U.S. financial institutions would not have survived to date.