Are TARP Repaying Banks Good Investments

Whether or not now is a good time to invest in banks that are repaying their US government bailout dollars to the Treasury is an easy analysis to make, but a tricky question to answer.  Which among banking stocks like JP Morgan ( JPM ), Goldman Sachs ( GS), Bank of New York / Mellon ( BK ), and Wells Fargo ( WFC ) are good stock market investments in this economic environment?

For those large US banks who never really wanted any government bailout money in the first place and that have stayed relatively stable and profitable since taking the TARP funds, now might be a good time to invest.  However, for those US banks trying a little bit too hard to look like the good banks that are repaying their government loans with ease, the answer is much different.  The tricky part is knowing the difference.

Recently released emails and documents from the US Federal Reserve suggest that certain big banks had to be brought in line for the good of the whole industry when it came to taking government aid.  Other banks, like Citigroup, were already teetering too much on the edge of bankruptcy to have any real shot and avoiding a bank collapse without government help.  In between were the other big banks which definitely benefited from the banking bailout.  Knowing whether they are stronger or weaker bank stocks now is difficult to tell.

Analyzing US Bank Stocks

Any bank that was on the verge of collapse without government help should be avoided as an investment.  The only difference between now and six or eight months ago is that the economy is a little bit better.  A lot of that economic improvement is because of the massive economic stimulus package passed by Congress and the Obama administration.  Stimulus like that doesn’t last forever and if it wears off at the wrong time, the economy could head straight back down taking those banks and their stocks back with it.

Banks that never really needed the TARP funds or the CAP program are better investment targets although they will continue to be tainted by the sector overall and may have trouble returning to full health.  However, considering the banking industry no longer has a giant housing boom to bail it out if things are a little off, and that consumers might not be quite as anxious to do the kinds of banking business they used to even if things get better, the banking industry may be in for many years of lean growth regardless of how strong any single company is.

Banks that over-reached to repay their TARP money are also in danger of getting back into trouble.  Some banking companies have undone YEARS of share buybacks by reissuing as much or more stock than they managed to buy back over those years.  That means that those bank stocks will have a big supply to continuously weigh down on share prices.  It also means that forgoing all of those dividend payments over the years were wasted since there is just as much stock now as their used to be.

Banking Sector Health

Lastly, never forget that usually the way a troubled sector is able to rebuild and move forward is that the weaker players and the poorly managed companies die off and are forced into bankruptcy or sold to stronger better managed competitors.  With the US Government and the US Treasury Department stepping in a saving many of those weaker and badly managed banks, the sector did not have the necessary purge.

That means that when things return to “normal” there will be just as many competitors trying for the same number (or less) customers which means smaller profit margins and little or no room for error.  Just because that bank didn’t go bankrupt this year doesn’t mean it won’t next year, or the year after.

For now, banks are an unusually risky stock investment with little or none of the traditional upside of risky investments.  If you want to take on more risk in anticipation of a stock market run or a steadily improving US economy, then by all means do so.  Just find your risk somewhere where there are better rewards to go along with that risk.

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Tags: Bank Stocks, investments, Stock Analysis, Stocks