Are Big Banks — or Any Banks — a Buy?

Throw the baby out with the bath water! That’s what critics of the banking system likely are chanting as bank after bank continues to demonstrate an unwillingness to learn from past mistakes.

Risk is no longer a four-letter word as Jamie Dimon and his well-paid gamblers bankers at JPMorgan Chase (NYSE:JPM) are proving. Is there a single banking institution in America that isn’t driven by indefatigable greed? Probably not, but in deference to the few corporate souls resembling George Bailey rather than Henry Potter, I’ll examine the pros and cons of investing in the big banks — or any bank for that matter — and who you should and shouldn’t trust with your hard-earned investment dollars.

SNL Financial, in conjunction with Forbes, analyzed the 100 largest publicly traded banks and thrifts as of Dec. 1, 2011. The list has banks with assets anywhere from $4.6 billion to $2.3 trillion. Using eight financial metrics, Forbes was able to rank the companies based on asset quality, capital adequacy and profitability. The usual suspects — Citigroup (NYSE:C), JPMorgan Chase, Wells Fargo (NYSE:WFC) and Bank of America (NYSE:BAC) — ranked 23rd, 48th, 79th and 91st, respectively.

That the biggest banks aren’t rated very highly shouldn’t come as a surprise. After all, when you can lose as much as $5 billion trading derivatives as JPMorgan Chase has done and not have a clue how it occurred, it’s pretty clear the left hand doesn’t know what the right hand is doing. Good on Jamie Dimon. Wasn’t he the one who claimed journalists are overpaid? Payback’s a bitch. You might want to add “Banker with Ego” to the list. Under no circumstances should you own JPMorgan Chase stock while this man is CEO.

The best banks, in my opinion, are those who have reasons for being that you could explain to your 91-year-old grandmother.

The Federal Reserve’s March stress tests revealed that 15 of 19 banks passed, with Citigroup a notable exception. The Tier 1 common ratio of those 19 banks averaged 10.1%. So, seeking banks with Tier 1 common ratios that are higher than 10.1% and ranked in the Forbes list, BankUnited (NYSE:BKU) immediately jumps to mind with a ratio of 37.3%.

BKU recapitalized in May 2009 with a $900 million investment from an A-list of private equity investors that includes Olivier Sarkozy, former French President Nicolas Sarkozy’s half-brother.

In addition to possessing one of the highest Tier 1 common ratios in banking, its non-performing loans to total loans is 0.92%, which is more than satisfactory. BKU is Florida-based, and it has a top-notch management team in place that’s servicing the needs of small- and medium-sized businesses as well as consumers, primarily in the Miami area. It went public in January 2011 at $27 a share, raising $783 million for its expansion plans.

Armed with the additional funds and a business model that’s straightforward and easy for Grandma to understand, BankUnited’s future is very bright.

Here’s a tough question: What do you think is Silicon Valley Bank’s specialty? I’ll give you a hint — it starts with “venture” and ends with “capital.” The bank has been a favorite for a long time because of its laser-like focus.

Part of SVB Financial Group (NASDAQ:SIVB), Silicon Valley Bank caters to innovative businesses around the world. With a management team that averages 12 years working at the company, SVB has more than 600 venture capital and private equity clients, $20 billion in total assets and a $7 billion loan portfolio with 62% lent to companies in technology and life sciences. In addition, approximately 7% or $467 million are loans for early-stage companies. While JPMorgan Chase is pushing paper, these guys actually are helping grow the economy.

If you must invest in big banks, please have the good sense to choose one from outside the country. In early May, I highlighted the fact that of the world’s 20 strongest banks, only three were American and not one was in the top 10. The best opportunities outside the U.S. trading on an American stock exchange are north of the border, where four Canadian banks made the top 10, averaging Tier 1 capital to risk-weighted assets of 13.7% — 120 basis points higher than the average of JPMorgan Chase, PNC Financial (NYSE:PNC) and BB&T (NYSE:BBT), which are the American banks in the top 20.

Of the Canadian banks, my personal favorite is the Bank of Nova Scotia (NYSE:BNS), whose presence in emerging markets makes it a better candidate for growth. Oddly, there are no Australian banks on the list.

Recent events suggest investing in America’s big banks is only for true risk-takers. Opportunities exist like the ones mentioned previously in smaller, regional banks, but those are franchises with very focused business models. At any size, you can’t be all things to everyone. Take a closer look at the Canadian banks and you’ll see that despite their size, they aren’t participating in every market and they’re being selective with their bets.

America’s banking industry continues to struggle. I’d be extra careful where you choose to invest. There’s no sure thing.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

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