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Bank Stocks - Best Bank Stocks to Invest In

Posted on Tuesday, December 3rd, 2019 by Matthew Sweeney

Bank Stocks - Best Bank Stocks to Invest In

Bank stocks are securities on the publicly traded market that are issued by banks. Though banks themselves invest in the stock market, they too are publicly traded companies listed on Wall Street. There are almost 6,800 FDIC insured banks in the United States, and while not all of them are publicly listed, many are part of a holding company (like U.S. Bancorp) that is publicly listed.

Top Banks in the World

When it comes to banking stocks, these companies are true assets poised to yield big earnings for investors in the banking industry sector.

Banking Sector

Banking is what makes complex economies possible, so the business of banking is generally in good health—but the occasional financial crisis that occurs in low points of market history has been known to make some banks go underwater.

Essentially, the way deposit banking works is that consumers deposit money for safekeeping with the bank, which then in turn loans that money out for a return, making profits on the net interest margin. This is primarily the difference between the money they make from charging interest on their loans and the interest payments they make to account holders. Banks piloted by competent management have leveraged this supply of cash and transformed their bank into an international behemoth, with investments in a variety of fields from real estate to tech to oil.

Of course, aside from small business owners seeking a line of credit and homeowners applying for a mortgage, banks also make sizeable loans to larger enterprises, such as Bank of America’s loan to the Disney Company to fund construction of Disneyland and Disneyworld. Of course, when investments that pay off, banks make even more money—which in turn is great for investors, especially the ones collecting dividends.

Though crude forms of banking go all the way back to the days of antiquity, modern banking as we know it has its roots in the Italian Renaissance and the affluent cities of Venice, Florence, and Genoa. By the 18th century, banks accepted deposits, changed currency, issued loans, and began issuing bank notes (paper currency).

Today, globalization and the internet have added even more complexity to the banking scene, while opening up new horizons, such as cryptocurrency and blockchain. Using the deposit services of a retail bank is fairly universally standard, which means that banks have large amounts of capital at their disposal. The biggest banks are some of the world’s most prosperous and largest businesses in the world in terms of assets and net worth.

Top Banks in the World

Banking is done around the world, and this sector can yield serious earnings for investors. Here are some of the big banks in the financial services industry:

Chase Bank is the retail banking arm of JP Morgan Chase & Company (NYSE: JPM). Until it merged with JP Morgan at the advent of the 21st century, it was known as Chase Manhattan Bank—which in turn was formed by a merger of Chase National Bank and The Manhattan Company in 1955.

Today, Chase operates 5,100 domestic branches, employs close to a quarter of a million people, conducts business in 100 countries, and has assets valued at above $2.5 trillion—so it’s easy to see why Chase is one of the “Big Four” American banks. Chase National was formed in 1877, and rapidly expanded in the 1920s when it acquired a number of smaller banks, but it became the biggest bank in the world in 1930 when it acquired the Equitable Trust Company of New York, the largest stockholder of which was a Rockefeller. This Rockefeller connection helped Chase form close ties with General Electric, Standard Oil, and ExxonMobil. Once Chase merged with JP Morgan, it further acquired Bank One, making Chase the biggest issuer of credit cards in the US.

Wells Fargo (NYSE: WFC) is a quintessential American success story of seizing golden opportunities and changing with the times. The company began as a banking and express service in the age of the California Gold Rush. California had just become a state, and the express and banking industries were totally unregulated. Any entrepreneurial spirit with a team of horses could open an express service, and anyone with a room and safe could open up a bank. Though there was a lot of competition in these particular industries in the Wild West, Wells Fargo survived a banking panic in mid-19th century, namely because they had avoided transferring the bulk of their assets to New York and had enough cash on hand.

Emerging with practically no competition, Wells Fargo began to rapidly expand in the stagecoach industry—but the railroads put an end to that. So, Wells Fargo shifted to a focus on banking, miraculously emerging (again) from the San Francisco Earthquake to become one of the premier financiers of rebuilding the Queen of the West. Fast forward 100 years, and Wells Fargo is the world’s fourth largest bank in terms of market capitalization, and the fourth largest US bank in terms of assets.

Bank of China is a state-owned central bank (one of four) based in Beijing, maintaining close ties to its legally separate subsidiary, Bank of China Hong Kong. Founded in 1912, Bank of China is now the fifth largest bank in the world in terms of market capitalization, and the fourth largest in the world in terms of asset value (the three ahead of it are also state-owned Chinese banks).

Forbes has dubbed Bank of China as the world’s fourth-biggest company, which is not surprising given China’s massive size and push to dominate the global economy in recent years—especially through projects like the Belt and Road Initiative. Bank of China’s logo is meant to suggest an ancient Chinese coin with a square hole in the middle (for threading them on a string), and it can be seen around the world in places diverse as New York City, Ontario, Tokyo, and Sao Paulo. Though Bank of China is state-owned, it is publicly traded, but you won’t be able to buy and sell this stock on the New York Stock Exchange. Instead, its shares are traded on the Shanghai Stock Exchange and the Stock Exchange of Hong Kong.

HSBC (NYSE: HSBC) stands for the Hongkong and Shanghai Banking Corporation, which was founded in 1866 in the then-British colony of Hong Kong. HSBC prospered greatly from the business of importing into China, including opium. With the transition of Hong Kong back to China in the 1990s, HSBC moved its headquarters to London. Today, it remains an international enterprise with almost 40 million customers across Europe, Africa, Asia, Oceania, and the Americas.

HSBC is split into four different outfits: commercial banking, investment banking, retail banking, and private banking. It is the second-largest company listed on the London Stock Exchange, just after Royal Dutch Shell, with a recent market cap of more than 100 billion pounds. HSBC is also the seventh-largest bank in the world, the largest bank in Hong Kong, and the largest bank in Europe, with assets totaling just shy of 2.6 million USD. While HSBC will remain headquartered in London, Brexit (Britain’s exit from the European Union) will see HSBC incurring as much as $300 million in legal and relocation fees in order to maintain important ties to the continent, and possibly as much as $1 billion in revenue losses.

BNP Paribas (Euronext: BNP) is France’s premier banking outfit, with operations in 77 countries. This 8th-largest bank in the world was formed by a merger of Banque Nationale and Paribas in 2000, but has roots going back to the early 1800s. BNP emerged from the revolutionary upheavals of the mid-19th century, which destroyed an old credit system that was already strained from the railroad boom and industrial growth.

BNP then benefited by absorbing regional banks underwater because of the 1929 Stock Market Crash and by expanding its retail operations in the French Colonial Empire—then again as France was rebuilt after WWII. Today, BNP Paribas serves around 30 million retail customers in France, Belgium, and Italy.

If you reside west of the Mississippi, you might recognize their wholly-owned subsidiary Bank of the West, and if your way of saying hello is “Aloha,” then you might be familiar with their tropical arm First Hawaiian Bank. BNP was the 5th-largest bank in the word after the 2008 financial crisis, but faced serious losses after being fined the largest sum ever for violating US sanctions by processing transactions with blacklisted countries.

Bank ETF

An exchange-traded fund is similar to a mutual fund in that it represents a single share of diversified holdings. But an exchange-traded fund is also similar to a stock in that it can be bought and sold on the market. Instead of placing money into a mutual fund, where you do not buy shares, you deposit liquidity. That said, ETFs are a great way for retail investors to get involved with the banking industry and generate income without active trading.

While the banking industry is not necessarily made up of the most active stocks, there is some degree of risk involved. Banks are closely tied into the market, so if things get bad—really bad—then sometimes a bank will go under. But by and large, this tends to be a rare event these days. The cataclysmic events of the past have inspired world governments to make stabilizing mechanisms like planned rate hikes, a general monetary policy, and a federal reserve. That said, most bank stocks are a safe bet.

However, it takes only a quick look at the history of any bank to see that almost all of them have been implicated in financial crimes of one sort or another, from Wells Fargo opening up fake accounts to meet sales goals, to Chase transacting business with the Nazi party during WWII. When these unsavory ethical shortcomings come to the attention of the press, the individual stocks of a particular bank can suffer, and then suffer more when the regulatory agencies crack down—either by fining them heavily or by curbing their future growth until certain conditions are met.

Banks are required to be transparent about profits and operations. They cannot hide their balance sheet or net income. But with the business of wealth so tied into every aspect of the economy, the banking industry can easily affect everything from the global economy to the domestic housing market. Banks are often accused of exerting undue influence or originating manipulative market strategies.

That said, a bank ETF can mitigate some of the risks, since you won’t have to sink all your eggs into one basket. With your holdings diversified, you can benefit from the best growth stocks in the industry, while avoiding the riskiest sinkholes. The Select Sector SPDR Fund (XLF) is the largest financial sector ETF, with most of its assets invested in Chase and Berkshire Hathaway. Vanguard Financials (VFH) is the second-largest, with holdings in larger banks like Bank of America, and smaller bank stocks.

Should I Invest in Bank Stocks?

No matter your investment objectives, the banking industry is a great way to build equity, not only for those financial investors looking to build dividend yield from dividend stocks, but also for investors looking to stabilize their retirement portfolio—and perhaps make some dividend earnings in the meantime.

Bank stocks are foundational for any dividend investing strategy because they pay some of the best dividends on Wall Street. But even if cash flow and dividend growth aren’t your primary goals, bank stocks are still a great way to stabilize your portfolio. Banking is not a seasonal or cyclical industry like consumer discretionary stocks, and it’s not a breeding ground for (as-yet) unproven industries like marijuana, biotech, 5G, and AI. Most banks have been around for more than a century.

If you’re an active trader, you might prefer some of these more volatile industries, which have larger price movements day in and day out. Bank stocks may not be the biggest stock gainers, but the high liquidity of select bank stocks make them attractive and seemingly easy options for quick entries and exits.

If you’re building your own portfolio without the help of a financial advisor, it’s always best to avoid over-focusing on any one particular industry. That said, you may not want to exclusively purchase shares of bank stocks, but given the relative stability of the banking industry as a whole, it’s easy to view bank stocks as a safe investment. This gives you some leeway to take on a reasonable amount of financial risk in other areas.

Companies Mentioned in This Article

CompanyCurrent PricePrice ChangeDividend YieldP/E RatioConsensus RatingConsensus Price Target
JPMorgan Chase & Co. (JPM)$136.81flat2.63%15.20Hold$124.17
Wells Fargo & Co (WFC)$53.79flat3.79%12.28Hold$49.85
HSBC (HSBC)$38.43flat5.15%12.20Hold$40.59
BNP Paribas (BNP)€52.05flatN/AN/ABuy€53.70
Financial Select Sector SPDR Fund (XLF)$30.71-0.4%1.82%N/AN/AN/A
Vanguard Financials ETF (VFH)$76.21flat2.10%N/AN/AN/A

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