Are World Banks a Good Buy?

From the abyss to the peak

Those of you who think right now about Lehman Brothers, Bear Stearns and other banks, may say to themselves that you have to be a lunatic in order to buy stocks in the world financial sector.

It was only two years ago when banks lost it all. Some of them were shut down, others were saved by the governments, and some are still deep in debts.

I say to the readers: yes, you are absolutely right, especially when you add to the equation the European crisis, the Greek and Irish banks, and when you hear Prof. Roubini speaking about another catastrophe in the markets.

Banks are a financial barometer

Banks do what every businessman tries to do. They try to buy it for low prices and sell it for high prices, and they take risks for that.

This is why you get low interest for your deposits and pay very high interests for your loans or when you don't pay your credit bills on time.

Persons and households are small numbers when compared to banks’ real business. If many companies out there take hundreds of millions of dollars in loans from any bank, and their business is doing well, then we should expect that the banks will get their money back.

3Q and the banks

The third quarter financial results were very good for many companies. The TSX is near 13,000 points, the Dow Jones is over 11,000 points and the NASDAQ is traded over 2,500 points. This is because companies did well, and when companies do well the banks also do well, because they rely on the cash flow from those companies.

Good news from Israel

The Israeli financial sector is considered to perform an upside of up to 10 per cent, according to many Israeli analysts. The analysts explain that the risks in the markets are lower than before, and that the low interest rates and positive sentiment in the market will make the companies do well and pay their debts.

Assuming that most debts are paid, then the profit on the banks' self capitol will be high and when that is found out the banks' shares will surge.

TSX financial sector

I wrote earlier this month in Shalom Life that the TSX financial sector is stuck around 180 points. Is the situation on Bay Street similar to the one in Tel Aviv?

Canada's banks are much more stable, responsible and conservative than most world banks. Like Israel, Canada was not impacted by the 2008 crisis as others were because of its responsible financial policy. It is not like Europe’s or the US financial sector.

Therefore I think that the local financial sector may be an interesting opportunity in the near future, especially in 1Q 2011.

This article does not recommend buying shares in the financial sector or in any other sector.