TAKING STOCK: Look to the great white north for good bank stock prospects

Dear Mr. Berko: I have $16,000 to invest in my IRA, and my broker has recommended that I buy Citigroup, Bank of America, Wells Fargo, JPMorgan and Bank of New York. He believes these five banks have "very attractive two- to three-year appreciation potential" and that my investment could triple in the coming three years. Please tell me what you think of this investment. Or perhaps you could recommend some other banks that you like. I'm a long-term investor and can afford to take some modest risks. Thank you. HL, Gainesville, Fla. Dear HL: I think that your broker has a bad case of GAPO (gorilla armpit odor) and a terminal case of infectious stupidity. His recommendations stink and could be the death of your $16,000. It was just a few years ago that bank issues were considered a dependable source of dividends and dividend growth for income-oriented investors. Then they crashed and burned. They're out of danger now but on a slow boat to recovery. Stay away from them. Five years ago, I told a reader that owning Citigroup in his portfolio was like having an elephant in bed with you. It's a huge animal - protective because of its size and weight but heaven help you if it sneezes and rolls over when you're sleeping! Of course, heaven wasn't there to help millions of shareholders ... and that squishy brown stuff under those elephants' feet is called slow investors. Today, these big banks have enormous exposure to the crises in Europe because they own huge chunks (they won't tell us how much) of European bank debt, and that exposure may force them to raise billions of dollars of new capital. The only U.S. banks I would consider are the smaller ones, such as Regions Financial (RF-$4.25), Fifth Third (FITB-$12.32), Associated Banc-Corp (ASBC-$10.65), Huntington Bank (HBAN-$5.23), Synovus Financial (SNV-$1.55) and a few others. These regionals don't have exposure to the debts of Italy, Spain, Greece, Hungary, Portugal, etc. And while their recoveries will be slow, they'll be quicker than the too-big-to-fail boys. However, a bank I'm comfortable recommending is the Royal Bank of Canada (RY-$46), which pays a $2.10 dividend that yields 4.8 percent. Revenues, earnings and dividends of this 1,760-location bank with 400 offices in 30 countries appears solid and promising. The dividend, which may be raised to $2.18 this year, is well-covered by expected earnings of $4.76 from $77.5 billion in revenues. RY is Canada's largest bank and has a Tier 1 capital ratio of 13.4 percent, which is about 22 percent higher than the 10.8 percent average for the top 10 U.S. banks. Mortgage lending in Canada is embarrassingly conservative and certainly too conservative for the likes of the U.S. Congress. RY's loan-to-value ratio on uninsured mortgages is 50 percent, which is a comfortable cushion if Canadian home prices fall. Meanwhile, Canadian mortgages are full-recourse (Congress wouldn't allow this either), which means that lenders can do more than foreclose; they can attach a mortgagee's other assets. This is one of the reasons that Canada's banking system emerged unscathed from the meltdown; it was a result of strict capital rules and a better regulatory environment. Another reason that Canada's banking system is healthy is that there are less than 30 banks in the entire country versus more than 8,000 in the U.S. Canada's GDP last year rose a solid 2.4 percent - double the GDP growth in the U.S. This year, Canada expects its GDP to exceed 3.1 percent versus less than 2 percent for the U.S. RY is a solid bank with solid management and has a board of directors that cringes at the unseemly behavior of its American counterparts, the Wild-West investment activities of American management and their excessive pay scales, bonuses and option grants. If you want banking representation in your portfolio, consider owning 100 shares of RY, and use your remaining cash to buy a few shares of Regions, Fifth Third, Synovus, Huntington and Associated. Sit on them for three to five years, and I suspect these investments will prove eminently superior to that brokester's recommendations. ---------- Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate website at www.creators.com. © 2011 Creators Syndicate Inc. Published: Wed, Feb 1, 2012