Bank shares still haven’t recovered from their March declines. That’s understandable, given the uncertainty around the sector, but I think it means there are some great opportunities available.
I’ve been using the opportunity to buy shares in two banks this week – Bank of America (NYSE:BAC) and Citigroup (NYSE:C). Here’s why I’ve opted for these over any of the UK bank stocks.
Sell first, ask questions later
Bank shares have been falling lately. But I don’t believe these declines are justified in the case of either Bank of America or Citigroup, which is why I’ve been buying both.
The last month or so has seen some significant stress in the banking sector. I don’t see any sign of the liquidity concerns that have troubled smaller regional banks at either BofA or Citi though.
In fact, the banks I’ve been buying might even be stronger than they were a month ago. The engine of each business is its deposit base, which has been growing as risk-averse customers move their cash.
Despite this, Bank of America shares have fallen by around 19% over the last month. And Citigroup shares are down around 11%.
I’m not saying that either is entirely without risk. That’s clearly not true – each has its own issues to contend with that present concerns for investors.
Tighter regulations – either for liquidity, or provisions for bad loans – might cut into Bank of America’s profitability. And Citigroup is in the middle of restructuring, which could prove expensive.
Over the last month though, a sell-first-ask-questions-later approach from investors has seen both stocks fall to levels I think are unjustified. That’s why I’ve been buying them for my portfolio.
Why not UK banks?
Fair enough, but something similar is true of UK banks. So why have I been buying the US banks, rather than Lloyds Banking Group and Barclays?
In my view, the US banks offer better shareholder returns. While Lloyds and Barclays offer attractive dividends, Bank of America and Citigroup also return capital to investors via share buybacks.
When companies repurchase their stock, the number of shares outstanding comes down. As a result, each remaining share accounts for more of the overall business, making it more valuable.
BoA has bought back 30% of its stock over the last decade, meaning each remaining share is worth 40% more. And Citi has repurchased 36% of its shares, resulting in a 56% increase in per share value.
With Lloyds and Barclays, there’s just no comparison. Lloyds has brought its share count down by just under 2% and the number of Barclays shares is higher than it was a decade ago.
That’s why I’ve been focusing on the US banks. As a UK investor, this brings an additional risk of currency fluctuations, but I think the additional return is more than worth it.
This post was originally published on Motley Fool
