2013 proved to be a great year for investors in the equity market, with the S&P 500 and Dow posting annual gains of 29.6% (the best since 1997) and 26.5% (the best since 1995), respectively. While each of the ten primary economic sectors saw positive growth, the Health Care, Discretionary, Industrial and Financial sectors all outperformed the general market indices.
Bank stocks in particular had a great year, extending the strong run that began in early 2012. Although the third quarter for banks was a lukewarm one due to interest rate uncertainty from the Fed’s announcement to begin its tapering plan soon, the KBW Bank index gained 36.9% over 2013 – bettering the 30% figure for 2012. The fact that the financial group that constitutes the S&P500 increased in overall value by well over 30% in 2013 only presents more proof of the strong year it was for financial companies.
Most notably, Morgan Stanley (NYSE:MS) saw its share value jump by 64% over the year followed by State Street (NYSE:STT) with gains of 56% – placing them comfortably ahead of all other large-cap banks. Investment banking giant Goldman Sachs (NYSE:GS) came in a distant third with a 39% increase in share price. All banks booked handsome gains, though, with most of them recording rallies north of 32%. In fact, even the large-cap U.S.-based bank with the smallest gain – U.S. Bancorp (NYSE:USB) – performed in line with the Dow. European banks were not so lucky though, with only the Swiss banks gaining meaningful value this year due to their strong capital conditions.
|Bank||Ticker||2013 Change||2012 Change||2011 Change||High||Low|
|Bank of America||BAC||34.11%||108.81%||-58.32%||15.88||11.03|
|Royal Bank of Scotland||RBS||5.00%||69.39%||-56.22%||12.35||8.15|
The table above summarizes the change in prices for major bank stocks in 2013, along with the change in 2011 and 2012 for easy comparison.
The fact that investors have changed their outlook towards the banking sector considerably over the last two years is evident by the fact that the banks more than made up for the precipitous fall in share prices in 2011 in 2012 and 2013. After all, 2011 was a particularly bad year for banks with a series of quick, negative developments in the later half of that year – including S&P’s decision to downgrade the U.S. long term debt rating, a string of mortgage-related lawsuits filed against the banks, and Europe’s precarious debt situation.
But investor confidence in the sector has improved considerably since then, despite several stumbling blocks along the way in terms of tightening regulatory requirements, the rate-rigging scandal as well as poor internal risk-control frameworks at the largest global banks. This is due to the diligent efforts put in by the banks to clear their legal backlog even as improving economic conditions lend a helping hand to their bottom line figures.
The year 2014 begins with the Fed initiating its tapering plans this month, and although it intends to keep interest rates at the current low levels for the time being, it is just a matter of time before rates begin normalizing. With key economic indicators showing positive signs for the future, the banking sector is poised for yet another profitable year in 2014 too.