Why investors should be leaving big bank stocks

@lamonicabuzz March 14, 2012: 1:03 PM ET
Most banks passed the Federal Reserve's so-called stress test. But Citigroup did not and that shows that many big bank stocks are still incredibly risky investments.

Most banks passed the Federal Reserve's so-called stress test. But Citigroup did not and that shows that many big bank stocks are still incredibly risky investments.

NEW YORK (CNNMoney) -- Bank stocks surged Tuesday ... before the Federal Reserve officially handed out gold stars and demerit badges to the top 19 financial institutions.

JPMorgan Chase (JPM, Fortune 500) sparked the rally by jumping the gun. Results of the Fed's stress tests, or Comprehensive Capital and Analysis Review, were not due to be released until Thursday.

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But JPMorgan Chase announced Tuesday it was raising its dividend and launching a new $15 billion stock repurchase plan ... and pointed out that the Fed had already completed the CCAR and "did not object" to the bank's plan. Shine on you crazy (Jamie) Dimon!

That prompted the Fed to move up the stress test announcement to after the closing bell Tuesday. Now that the results are out, it's time to look at the winners and losers.

The good news is that 15 of the top 19 banks should be able to withstand the Fed's worst-case crisis scenario. (Baby, you can drive my CCAR.)

U.S. Bancorp (USB, Fortune 500), Wells Fargo (WFC, Fortune 500) and BB&T (BBT, Fortune 500) also raised their dividends late Tuesday after getting a regulatory green light. Bank of New York Mellon (BK, Fortune 500) and Keycorp (KEY, Fortune 500) announced buyback programs.

But it's not a great sign that one of the banks that failed is Citigroup (C, Fortune 500).

Citi is one of the nation's largest banks and its inability to meet the Fed's capital requirements is a sign that the financial system still has not fully recovered from the depths of the 2008/2009 financial crisis.

Citi still has poorly-performing assets in its Citi Holdings subsidiary. That may be keeping the Fed from giving Citi a full clean bill of health.

March Stock Mania: The top eight face off in Round 3!

"It remains unclear what level of capital the Fed would currently be comfortable with for Citi to allow a buyback, given the Citi Holding assets," wrote David Konrad, an analyst with Keefe, Bruyette & Woods, in a report Wednesday.

Shares of Citi, which popped more than 6% Tuesday on hopes that the Fed would give it a good grade like JPMorgan Chase, fell 3% Wednesday.

Atlanta-based regional SunTrust (STI, Fortune 500) and MetLife (MET, Fortune 500), the insurer with a big bank holding company subsidiary, also "failed" the stress tests.

Interestingly, SunTrust rose 3% Wednesday morning while MetLife fell more than 4%, making it the worst performer in the S&P 500. (Privately held Ally Financial, formerly known as GMAC, also failed.)

Still, even some of the banks that passed the stress tests were getting punished Wednesday. Most notably, Goldman Sachs (GS, Fortune 500) was down nearly 3%.

It's possible the stock was falling due to the blistering remarks a now-ex-Goldman executive made about the company in an op-ed in The New York Times.

Titled "Why I Am Leaving Goldman Sachs," Greg Smth, a former director in the firm's derivatives business, described the environment at Goldman as "toxic."

While it's not exactly a huge surprise that big banks are doing shady things (ever hear of a book called "Liar's Poker?"), the fact that one of Wall Street's own was so willing to air a bank's dirty laundry is a bit stunning.

That is one reason why I've continued to be negative on many bank stocks this year, despite the big rally in the group.

Most of us simply do not know exactly how the big banks make money. We don't know if there will be more legal shoes to drop like the mortgage robosigning fiasco. We don't know just how much new regulations will hurt profits.

And as my colleague Stephen Gandel at Fortune points out today, there are reasons to be skeptical of the stress test results. Simply put, the stress tests may have not been all that stressful.

Citigroup's CEO gets a 14,000,000% raise

But the key takeaway from the stress test results is that investors should stop buying and selling big banks like they are all one amorphous, homogeneous blob.

The risk with buying something like the Financial Select SPDR (XLF) exchange-traded fund is that you'll have exposures to the banking groups's duds as well as the studs. You have to differentiate. To that end, the ETF actually fell Wednesday despite having some big winners.

Todd Hagerman, an analyst with Sterne Agee, wrote in a research report Wednesday that investors should move out of some of the higher-risk larger banks that have rallied so sharply this year and buy some of the regional banks with better credit quality. He recommends U.S. Bancorp, Wells Fargo, BB&T, Fifth Third Bancorp (FITB, Fortune 500) and PNC (PNC, Fortune 500).

It is telling that the banks that fared the best in the stress tests were not the big Wall Street firms like Chase, Goldman, Morgan Stanley (MS, Fortune 500) and Bank of America (BAC, Fortune 500). In fact, Goldman and BofA have yet to join other banks that passed with any announcements about dividends or buybacks.

And you would think that if any bank would be eager to finally raise its dividend, it would be BofA. The bank has been stuck with a paltry penny per quarter payout for some time now. That works out to a yield of just 0.5% compared to a yield of 2.5% for JPMorgan Chase.

The top performers in the stress tests were actually trusts (i.e. firms that manage money for the wealthy) like Bank of New York Mellon and State Street (STT, Fortune 500), as well as banks with large credit card operations such as American Express (AXP, Fortune 500) and Capital One (COF, Fortune 500). It's another example of boring banking being beautiful.

"If the market hasn't figured it out, banks that are more diversified should be able to withstand tougher economic conditions," said Blake Howells, portfolio manager with Becker Capital Management in Portland, Ore., a firm that owns stakes in U.S. Bancorp, State Street, Keycorp and JPMorgan Chase. "The big surprise is Citigroup. It was widely thought that Citi was in better shape."

All banks are not created equal. It's time investors recognize that.

Best of StockTwits: The Fed didn't raise rates Tuesday. Heck, it isn't likely to do so until 2014. But is the bond market already doing Ben Bernanke's job? The 10-year Treasury yield shot up to above 2.2% Wednesday. That's the highest levels for long-term rates since late October.

AronPinson: Forget the economy... The $FED will have to keep rates low so that we can afford to pay our interest payments. $TLT $TBT

Ha! Let's not hold our breath for QE3 or Operation Twist 2 just yet. Rates are rising but a 2.2% yield is still much closer to historical lows than worrisome highs.

DavidSchawel: Brokers this morning are practically tripping over themselves this morning pushing bonds w/ this selloff $TLT

bsmart: Has the major rotation from treasuries to equities begun? I think so. Frightening as it may be, Taleb may have a point. $TLT $SPY $QQQ

The move up in bond yields is a sign that investors not named the Federal Reserve are aggressively selling Treasuries as stocks continue to surge and traders again embrace risk.

As for Nasim Nicholas Taleb, author of "The Black Swan," he has been calling for a bond bloodbath for awhile. So his recent comments on that topic on CNBC are hardly anything new .. except that now he's starting to look like he's got the timing of the call right.

The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, and Abbott Laboratories, La Monica does not own positions in any individual stocks. To top of page

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