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Hate It for the Crash, Love It for Its Cash

By Robert Frick on October 9, 2015

The financial industry—particularly big banks and mortgage lenders—still has a PR problem, but it doesn’t have a profits problem. And those profits support our choice of financial firms in our Personal Finance portfolios. Further evidence of this came this week in a report from New York Federal Reserve economists.

The economists said that from 2009 to 2014 J.P. Morgan, Citigroup, Bank of America, Goldman Sacks and Morgan Stanley had a combined average annual net income of $41.73 billion, up from $25.08 billion per year from 2002 to 2008.

You’d think with all the carping about how tough new rules have hamstrung the financial sector, financial firms would be making less money, not more. But higher capital requirements (meant to cover losses from bad bets) and other rules to help avoid another 2008 meltdown don’t seem to have put a dent in the financial sector’s ability to make money.

And in investing, the difference between reality and perception is often an opportunity to make money.

The perception of banks is still negative, seven years after the financial crash. A Gallup report in June said that just 28% of people “have a great deal or quite a lot of confidence in the banks.” That’s up from the low point of 21% in 2012’s poll, but below the 40% average Gallup says the banking industry rated the past 35 years. In 1979, banks peaked at 60%, according to the report, titled “Why It’s Still Cool to Hate Banks.”

I suspect much of the rhetoric about banking regulations is politically motivated, and part of the “remove regulations and lower taxes to spur economic growth” philosophy espoused by many candidates.

But obviously, from the figures above, regulations haven’t depressed big bank earnings. Nor have they stifled small banks’ ability to lend—another claim made by the set-my-bankers-free contingent. In a column by Barry Ritholtz for BloombergView, he quotes American Enterprise Institute scholar Peter Wallison as claiming Dodd-Frank “has burdened small banks—and the business that rely on them—much more than large businesses that have access to capital markets. Is this why we’re experiencing the slowest recovery in two generations?”

Then Ritholtz shows a graph with data from the Federal Reserve Bank of St. Louis that proves commercial lending by small banks has zoomed up at the same rate as before the dot.com and real estate crashes.

So while financials may not give you warm fuzzy feelings, it would be a mistake not to consider them for your portfolio. In our Personal Finance Income Portfolio, for example, we have Umpqua Holdings (UMPQ), a company with banks, mortgage banking and other financial services, and which yields a sweet 3.8%. Also in that portfolio, People’s United Financial, yielding 4.2%.

Our Growth Portfolio includes Ameriprise Financial (AMP; 2.4%), U.S. Bancorp (USB; 2.44% yield) and Wells Fargo (WFC; 2.9%).

We’re also seeing the same phenomenon of stable financial companies at good prices north of the border. Our sister publication, Canadian Edge, has five finance companies with yields in the 3% to 4%-plus range, and given the Canadian dollar trades at a low point versus the U.S. dollar, those companies have the added feature of big capital appreciation when the currency situation normalizes.

So you may still be sore at bankers and think some should have gone to jail, but as long as they’re free to make money, have them make some for you.

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