Bank of America (NYSE:BAC)
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5 Years : From Jul 2011 to Jul 2016
The outlook for money center banks and financial institutes continues to brighten as the global economic forecast improves and companies build upon momentum generated at the end of last year. There could be setbacks along the way but growth in the near- and far-terms looks within reach. It is also becoming clearer that several major money center banks have applied the lessons learned in the last few years. Budgets are trimmer, lending practices more secure, provisions for loan losses fewer and operations more efficient.
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While the outlook for companies is bright, regulatory concerns will almost certainly factor into the performances of major global banking operations this year. Bank of America Corp. (NYSE: BAC), for example, has already set aside $6 billion for additional lawsuits according to a report from the Financial Times. That figure may appear foreboding initially but the fact that Bank of America was able to double its value last year while settling for billions in suits suggests any hindrances this year may not pose a major threat to its value. Weeks of negotiations between banks and Federal regulators may soon near an end this week regarding a $10 billion settlement to resolve the potential abuse of foreclosures over the last few years. Banks are on board with the deal and much of the money will go back to homeowners which could further improve the outlook for the housing market.
The housing market will likely play a more important role this year than it did in 2012. The effects of a third round of quantitative easing targeted specifically at the housing market are beginning to come into focus. Specifically, lending activities for a few major institutions have risen sharply over the last little while. At JPMorgan Chase and Co. (NYSE: JPM), third quarter 2012 lending jumped 29% over the prior year's period to reach an impressive $50 billion in home loans. If the housing market continues its recovery on its current trajectory, banks like JP Morgan may see loan activity improve even more along with margins and its bottom-line. It should be noted though that the industry as a whole is not completely on board with a housing market recovery and some continue to shift their focus away from home lending and into areas they deem more stable. There appears to be more evidence in favor of continued recovery than against it however. Joblessness has fallen below 8% and is projected to fall even further portending a potential release of pent up housing demand.
Investors will want to track the results of the coming rounds of bank stress testing. The stakes, in some ways, are even higher for this series of tests. Banks have rebuilt a substantial amount of goodwill with Federal regulators and in turn have positioned themselves to garner even more fiscal freedom with a successful stress test. The general consensus amongst money center banks is that more capital will be returned to investors in the form of dividends, share buybacks or a combination of the two. Some banks will put newly freed capital towards expansion and acquisition activity as well.
Overall, money center banks will still battle headwinds in the coming months but optimism continues to surround the industry. Regulatory concerns and sudden market shifts will be challenging but by no means insurmountable. Sustained improvement from the housing market will be important but not vital to profits. Successful stress tests will be key to investors in the short-term while also encouraging for the remainder of the year. Moderate growth looks well within reach for money center banks at the onset of 2013 but most importantly, they are currently positioned to be far more stable than they were a year ago.
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