Why I Like These Two Banks Right Now

In an ironic twist, the subprime credit crisis was probably what was needed to save the banking sector. The failure of Lehman Brothers that drove the financial crisis and recession also prompted the government to force big banks to clean up their business.

I still recall when Citigroup Inc. (NYSE/C) was trading at $1.00 a share in 2008, before its stock consolidation. A friend of mine at the time, who was the head of a global money management unit of a large bank, asked what I thought of Citigroup and whether I would buy it. My quick response was “yes.” I argued that I doubt the government would allow the bank to fail after what had happened at Lehman. In hindsight, I was right. Citigroup, along with some of the other big banks, was saved by the government.

I still feel it was a correct move and continue to believe the big banks were “too big to fail.” Without the emergency capital injection into the banking system, America’s financial infrastructure would have collapsed, which would have resulted in economic chaos and tens of thousands of lost jobs.

The best development in the process of reorganizing banking in America was the establishment of the “Volcker Rule.” Named after ex-Federal Reserve chairman Paul Volcker, it essentially required the big banks to play by his rules. In other words, banks were required to cut down the risk on their balance sheets with added disclosure. Of course, there are still some issues regarding banking improprieties, but essentially, the Volcker Rule has helped to create a stronger, viable U.S. banking system.

Evidence of that was shown last week with the big banks continuing to deliver relatively strong results.

JPMorgan Chase & Co. (NYSE/JPM), Wells Fargo & Company (NYSE/WFC), and Citigroup all delivered results that beat Wall Street estimates for both revenues and earnings.

I was not surprised by this, as I have long been a backer of the big banks. (Read “With Higher Interest Rates Coming, This Is Where You Need to Be.”)

In fact, the strong leadership from the big banks has helped drive up the overall market this year.

Just take a look at the chart of the Philadelphia Bank Index below—it’s a thing of beauty. Note the bullish flag formations indicated by the parallel lines that are preceded by a rally and followed by another rally, based on my technical analysis. This is bullish, and we’ll see if another flag may be in formation.

Chart courtesy of www.StockCharts.com

Moreover, I expect a potential upward push for the shares of Bank of America Corporation (NYSE/BAC) and Citigroup by institutional and retail money once these big banks are allowed to raise their dividend payout from their current low levels to what is now being paid out by Wells Fargo and JPMorgan.