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Bank shares have yet to recover from their March declines. That’s understandable given the uncertainty surrounding the sector, but I think it means that there are huge opportunities out there.
I have been taking the opportunity to buy shares in two banks this week. Bank of America (NYSE:BAC) and Citigroup (NYSE:C). This is why I opted for these over any of the UK bank stocks.
Sell first, ask later
Bank stocks have been falling lately. But I don’t think these drops are justified in the case of Bank of America or Citigroup, which is why I have been buying both.
The last month or so has seen significant stress in the banking sector. However, I don’t see any sign of the liquidity concerns that have worried the smaller regional banks in BofA or Citi.
In fact, the banks I’ve been buying might even be stronger than they were a month ago. The engine of every business is its deposit base, which has been growing as risk-averse clients move their cash.
Despite this, Bank of America shares have fallen about 19% over the last month. And Citigroup shares are down about 11%.
I’m not saying either is completely risk-free. That’s clearly not true: each has its own issues to contend with that raise concerns for investors.
Tighter regulations, whether for liquidity or loan-loss provisions, could reduce Bank of America’s profitability. And Citigroup is in the midst of a restructuring, which could prove costly.
However, over the past month, the sell-first-ask-later approach by investors has caused both stocks to fall to what I think is unwarranted levels. That’s why I’ve been buying them for my portfolio.
Why not UK banks?
Fair enough, but something similar is happening with UK banks. So why have I been buying American banks, instead of Lloyds Banking Group and barclays?
In my opinion, American banks offer better returns for shareholders. While Lloyds and Barclays offer attractive dividends, Bank of America and Citigroup also return capital to investors through share buybacks.
When companies buy back their shares, the number of shares outstanding is reduced. As a result, each remaining share represents a larger share of the overall business, making it more valuable.
BoA has bought back 30% of its shares over the past decade, meaning each remaining share is worth 40% more. And Citi bought back 36% of its shares, resulting in a 56% increase in value per share.
With Lloyds and Barclays, there is simply no comparison. Lloyds has reduced its share count by just under 2% and Barclays’ share count is higher than it was a decade ago.
That is why I have focused on US banks. As a UK investor this carries additional risk of currency fluctuations, but I think the additional returns are well worth it.
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