Buy The Banks!

It’s that simple. With superior growth prospects over the rest of the market, these three banking stocks are must haves in any growth portfolio. Bret Jensen is heavily over-weighting the sector in his own portfolio and he has three strong reasons why. 

We are getting into the meat of the second quarter earnings seasons even as the market is being buoyed by the latest “kick the can” agreement in Greece.  One thing is clear to me going through dozens of early reports. The environment for major banks is rapidly improving.  Given the sector sells at a significant discount to the overall market multiple in what I consider at least a slightly overvalued market, I have moved this financial sub-sector to heavily overweight within my own portfolio. I have myriad reasons to do so.

Interest rates are rising:

Yields have gone up significantly since the first quarter of this year. The ten-year treasury yield recently hit a 2015 high and hovers just below 2.5%. With the Federal Reserve set to hike interest rates for the first time since 2006 by year end and domestic GDP growth accelerating from a tepid first quarter, interest rates should continue to rise gradually over the next six to twelve months. This will help boost net interest margin growth, one of the biggest profit drivers at banks.

Default rates are at historical lows:

Loan loss ratios at Wells Fargo (WFC) are at their lowest levels in at least two decades and at JP Morgan (JPM) they are at lows not seen since the late 90s. With the strongest job growth in a decade and with wages just starting to accelerate, this trend should continue. Obviously these trends will be a continuing tailwind to earnings growth.

Housing is recovering:

Mortgage originations were up almost 30% year-over-year at Wells and better than that at JP Morgan this quarter. These are two of the largest bank lenders in the market and this growth shows that housing is getting better. In addition, home builder confidence is at a ten year high and housing starts are increasing at a solid pace. After being deeply under the annual average of the past three decades since 2007, housing starts are finally to tick up but have quite a way to go before they get back to long-term trend levels. With household formation increasing nicely and mortgage credit finally starting to loosen, housing activity should increase at a solid pace for years to come. Which will provide an important earnings driver to major banks.