3 Signs to Look for Before Investing in Financial Bank Stocks

When the economic crisis of 2008 bashed the financial sector, many of the country's largest banks traded at valuations that would have been unthinkable just a few years earlier. Some institutions have seen the price of their shares rebound, but they're still trading at levels below their pre-crisis levels. Market experts like Jim Cramer of Action Alerts PLUS and CNBC's Mad Money are telling investors to avoid the financial sector and look for safer stocks. Risk takers, especially investors who like the idea of getting back into investing in stocks before the prices get too high again, may choose to shun this advice and invest in banking institutions again. If you decide to go this route, pay attention to these three research areas before you jump back in. 1. Dividends The brink of collapse forced most banks to slash their dividends down to a few cents per quarter. JP Morgan Chase JPM, for example, dropped dividends to 5 cents (each quarter). Bank of America BAC cut its dividend payment to 4 cents per share, while Citigroup C eliminated dividends altogether. Now that banks' balance sheets are improving, some of them reinstated their dividend plans. Though JP Morgan Chase and Wells Fargo WFC have received permission to increase their dividends, Bank of America's board denied permission to boost payments. Key sign: Failing to receive permission to increase dividend payouts is a clear sign of a bank whose financial footing is not quite secure enough for investors yet. 2. Loan Losses To gain insight on banks, you'll have to take the time to read their balance sheets and financial statements. But these institutions have so many items that are stored off of the balance sheets, so you have to keep digging. Reading quarterly earnings reports, for example, will provide insight into the operations of a bank. Pay particular attention to loan losses and whether they are accelerating or decelerating. Key sign: Rising loan losses in the mortgage, credit card, or auto loan portfolio are clear signs of a bank that is still experiencing financial problems. Wise financial investors should only invest in banks whose losses have peaked and are headed downward. 3. Revenue Growth Bank earnings bottomed out during 2009 and 2010 as banks wrote off non-performing loans and took charge-offs. Compounding the problem, banks saw increased regulations and oversight from governmental organizations. The CARD Act of 2009 is expected to cost banks billions in revenue over the next decade. However, bank CEOs and executives have had enough time to adapt and come up with new ways to generate revenue to make up for lost income from fees. Key sign: Banks whose managers have come up with plans to recover revenue are the good investment opportunities. Final Thoughts Though you might think that the banks and investment firms have a better idea of how to recover, the financial sector is really just like any other market sector. Some companies are good investment opportunities; some are bad risks. If you ignore the entire sector just because of a few bad apples, then you could miss a smart, savvy investment move. Now that you know the three keys to good value investments in financial bank stocks, you can find a low share price with great potential. What financial bank stocks are you holding, and how did you make your choice? Mark Riddix is an investment management professional and founder of New Horizons Financial Management. Mark also contributes investing and financial content for Money Crashers, one of the top personal finance blogs. He writes a weekly column for Benzinga every Wednesday.