U.S. bank stocks have rallied since the financial crisis. We asked Paul Harris of Avenue Investment Management how he picks bank bargains for the Harvest Banks & Buildings Income Fund.
How important is book value for buying bank stocks?
Buying a bank stock below book value has always proven to be very fruitful over the long term. U.S. banks are one of the cheapest parts of the equity market. There are large U.S. banks trading at or below book value, while the big Canadian banks are at about two times book.
Is the U.S. banking sector still cheap?
The easy money has been made, but these bank stocks are only halfway through their rally. The U.S. housing market is turning around, so that is helping consumers and the retail banking arm of the business. The credit quality of borrowers has improved since 2009, so banks' loan books will provide downside protection. With their large global investing banking arms and massive retail banking franchises, the earnings power of U.S. banks is certainly better than Canadian banks.
Which banks look like bargains now?
We like Bank of America and Regions Financial Corp., a regional bank focused on southeastern states. Both trade below book value. We also own JPMorgan Chase & Co., which trades at book value. These stocks can trade up to two times book, so there is still room for them to go up.