Banks Year In Review: Banks Make Up For Dismal 2011 With 2012 Surge

by Trefis Team
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Bank shares had a dream run in 2012, and any investor who bet some money on the financial sector over the year with a medium to long term investment horizon in mind would only be regretting one thing, not investing more money than he or she did. After ending 2011 as the sector to incur the biggest losses, financial companies showed a remarkable turn around in 2012, to become the sector to gain the most value. The financial group that constitutes the S&P500 increased in overall value by well over 25% in 2012, compared to a 12% jump for the S&P500 index itself over the period. The KBW Bank Index closed 30% higher on 31 December 2012, than it did on 30 December 2011, highlighting the performance of U.S.-based banks in particular for the year.

Most notably, Bank of America (NYSE:BAC) more than doubled its value over the year. An interesting coincidence here is that the global banking group swung from being the worst performing Dow Jones Industrial Average (DJI) component and the fifth-worst performing S&P500 component for 2011, into becoming the best performing Dow Jones Industrial Average (DJI) component and the fifth-best performing S&P500 component for 2012. The shares of the U.K.-based banks Royal Bank of Scotland (NYSE:RBS) and Barclays (NYSE:BCS) also skyrocketed over the year, gaining 69% and 58% respectively. Other U.S. banks that recorded some handsome returns are Citigroup (NYSE:C), with a 50% hike, and Goldman Sachs (NYSE:GS), up 41%.

See our full analysis for Bank of America | RBS | Barclays | Citigroup | Goldman Sachs

Bank Ticker 2012 Change 2011 Change High Low
Bank of America BAC 108.81% -58.32% 11.69 5.62
Royal Bank of Scotland RBS 69.39% -56.22% 10.88 6.01
Barclays BCS 57.60% -33.47% 17.54 9.23
Citigroup C 50.36% -44.38% 40.18 24.61
Goldman Sachs GS 41.06% -46.22% 129.72 90.43
Capital One COF 36.98% -0.63% 61.83 43.12
UBS UBS 33.05% -28.17% 17.00 9.78
JPMorgan Chase JPM 32.24% -21.62% 46.49 30.83
BNY Mellon BK 29.08% -34.07% 26.25 19.30
Morgan Stanley MS 26.37% -44.38% 21.19 12.26
Wells Fargo WFC 24.02% -11.07% 36.60 27.94
USB USB 18.08% 0.30% 35.46 27.21
Deutsche Bank DB 16.98% -27.26% 52.54 27.03
Credit Suisse CS 4.60% -41.90% 29.97 16.09

The table above summarizes the change in prices for major bank stocks in 2012, along with the change in 2011 for easy comparison. Do note that the price change is calculated taking the closing prices of a stock on the last trading day of a year to the last trading day of the next year.

The fact that investors changed their outlook towards the banking sector is evident from a single glance at the table, with Bank of America swinging from the near 60% decline in 2011 to an almost 110% rise in 2012.

2011 Was An Exceptionally Bad Year For Banks Due To A Number Of Reasons…

The series of quick, demotivating developments in the later half of 2011, caught investors off guard, and they responded by shunning bank stocks. This period was marked by the S&P’s decision to downgrade the U.S. long term debt rating from the coveted AAA to AA+ in August 2011 (see Looking at Why the Banks Tanked). And then a string of mortgage-related lawsuits were filed against the banks, with lawsuits filed by the the Federal Housing Finance Agency (FHFA), against 17 global banks being the most notable ones (see Legal Woes Continue for Bank of America). Europe’s debt situation also looked precarious around that time with fears of the crisis spreading over to stronger Euro zone economies including France and Germany gripping investors.

Bank stock were already down in the dumps when rating agencies continued to demoralize investors with their regular downgrades or announcements of possible downgrades of ratings for global banking institutions, as well as European nations, leading to significant declines in share price.

… And That Is What Makes A Rather Normal 2012 Stand Out As Outstanding

Then 2012 came with its own share of problems. Europe continued to report poor economic growth with the fears of a recession looming at large from stagnating growth in the U.S. compounded by swelling unemployment figures. China’s economic growth slowed towards the middle of the year, and a deadlock between the two U.S. political parties over steps to avoid the impending U.S. fiscal cliff figured high on investors’ minds in late 2012.

The banking sector itself continued to receive major jolts. Lawsuits related to banks’ practices prior to the economic crisis continued to surface every now and then. And even as regulators pieced together tighter capital and oversight requirements for financial institutions, JPMorgan’s $6 billion loss from a hedging strategy gone wrong raised questions about risk management at banks (see JPMorgan’s $2 Billion Hedging Loss Hits The Entire Banking Industry). And Barclays’ $451 million fine for manipulating the benchmark Libor opened the door for investigations against 16 of the world’s biggest banks in the Libor scandal (see Barclays Paying $451 Million in LIBOR-Fixing Case, Who’s Next?).

But then, there was also a lot of good that came banks’ way in 2012. The major banks settled some of their most sticking legal issues, most notably the $25 billion foreclosure agreement by the country’s five biggest mortgage servicers (see Foreclosure Settlement Makes it to Federal Court for Approval). House prices showed a steady growth throughout the year, helping banks report strong mortgage revenues. The Fed’s decision to continue buying-back bonds also gave the economy an impetus, spurning retail and investment banking opportunities.

On their parts, almost all of the banks responded to the global economic situation by announcing significant organization-wide changes and cost-cutting measures while continuing to shore up their capital. And some like Bank of America did so quite effectively buoying share prices. After all, much of the decline bank shares witnessed in 2011 was linked to their being perceived as too risky, a perception that changed to a large extent over 2012 with quite some effort from the banks.

Investors start 2013 on a positive note, with hopes that the recent deal between Democrats and Republicans will put concerns about the fiscal cliff at bay and set the stage for future agreements on other outstanding issues. The picture in Europe also looks stable to a large extent with Euro zone members aiding the weaker economies to ensure that they are not forced to abandon the euro, something which could significantly devalue the currency.

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