Buy-and-hold investors that sold shares of Bank of America and Citigroup on Monday may want to consider getting back in.
The selloff appeared to be driven by a report in the Wall Street Journal Saturday that some officials in the government want BofA to issue more equity before allowing the bank to pay back the $45-billion (U.S.) it owes the U.S. Treasury under its Troubled Asset Relief Program. That, of course, would mean dilution for BofA shareholders, and the bank led a broad selloff in the sector Monday with its shares dropping more than 5 per cent. Citigroup and Wells Fargo , which have also yet to repay the Treasury, fell by 4.26 per cent and 2.97 per cent respectively.
Even banks that have already repaid the TARP money, like JPMorgan Chase, Bank of New York Mellon and U.S. Bancorp sold off sharply, presumably on the theory that regulators would apply similarly tough standards to those healthier banks as well.
While on the one hand, it makes perfect sense that bank investors would sell their shares on this news, it may actually be good thing for shareholders if U.S. banks are prodded raise additional capital. For one, if they do go this route, they will look more like Canada's banks, and, if you're judging by stock performance over the last half-decade or so, that would be a big positive.
Shares of three of Canada's five largest banks, Royal Bank of Canada, Toronto-Dominion Bank and The Bank of Nova Scotia have outperformed those of JPMorgan during the past five years. The two that haven't, Bank of Montreal and the Canadian Imperial Bank of Commerce, have fallen short of JPMorgan's performance by just a few percentage points, and have outperformed Bank of New York and U.S. Bancorp, not to mention Citi and BofA.
In the wake of the crisis, Canada's banking regulators are getting increasing attention from their peers around the world, including in those in the United States. Monday's selloff aside, the regulatory trend toward requiring U.S. banks to hold more capital could very well provide a significant benefit for long-term investors in the sector.