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Bank Stocks Are Back

In a big symbolic move this week, Moody’s removed the U.S. banking system from its “negative outlook” category for the first time since 2008.

Investors shouldn’t place much stock in credit ratings agencies — after all, they were very late to the subprime crash. But the upgrade to the banking sector (belated, as usual) is noteworthy because it signals that investors should already be seizing opportunities in financials.

If you haven’t noticed, banking stocks are back. Take a look at these returns among major financial companies since Jan. 1:

  • Bank of America (BAC): up 15%
  • Wells Fargo (WFC): up 18%
  • PNC Financial (PNC): up 22%
  • JPMorgan Chase (JPM): up 24%
  • Goldman Sachs (GS): up 28%
  • Regions Financial (RF): up 30%
  • Morgan Stanley (MS): up 30%
  • Citigroup (C): up 32%

Those are just the big boys, too. In the smaller arena of regional banks, there is a lot more stability as well.

This week, the “Unofficial Problem Bank List” maintained by Bill McBride over at Calculated Risk declined to 767 institutions with assets of $283.7 billion. A year ago, the list of troubled banks totaled 931 institutions worth $358 billion — that’s a significant improvement, and another sign that distress is slowly leaving the sector.

Furthermore, the number of failed banks that have entered into FDIC receivership is just 13 so far in 2013 — totaling just north of $300 million. In comparison, there were a whopping 140 bank failures in 2009 and 157 in 2010, worth about $250 billion combined. If we can see the failure rate cool just slightly, and if we finish the year under 25 closed banks, it will be the “best” year since a mere three banks closed in 2007 before the Great Recession.

The housing rebound has juiced the mortgage market as well as broader financials, but a focus on more creditworthy customers and efficiencies have propped up earnings too. JPMorgan actually just set a record for earnings in April, showing you how healthy some of the big players are.

There are still troubles, of course. The top line is growing slowly (if at all) for many financials as the economy slogs away with only incremental improvement. Banks are inherently cyclical, and we need a more robust recovery to truly help them hit their stride.

Also, some financial stocks still have rickety balance sheets. BB&T (BBT) was one of two financial institutions (government ward Ally [GMA] was the other) that failed Federal Reserve stress tests in March — so there still is some systemic risk, and investors need to do their research.

Furthermore, Citigroup and Bank of America continue to build up rainy day reserves instead of delivering capital back to shareholders, paying a meager dividend of a penny a quarter. Worse, they have stopped even asking for significant increases because they don’t expect approval. If you’re focused on income, this could be a nonstarter.

But those negatives aside it’s clear that the financial sector is on the mend. And judging by the big returns in 2013, bank stocks appear to be back.

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Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

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