Surprisingly the finance and financial services sector in the United States may have become a very good investment. The third quarter financial numbers indicate very good performance at a variety of US financial institutions and companies.

Banks, fintech companies such as PayPal Holdings (NASDAQ: PYPL) and even credit card providers have been doing very well lately. Their performance is so good that it points a recovery at least in that U.S. sector.

Revenues and net incomes are up at a number of companies and some of them are increased dividends and higher returns on equity to customers. Some US financial services stocks have been performing so well lately that they might have become value investments.

American financial services is a potential value investment because many of the companies in it are making a lot of money despite recent scandals at Wells Fargo (NYSE: WFC) and the looming debacle at Deutsche Bank (NYSE: DB). The sector is also growing, according to the revenue figures making it an interesting long term value investment.

A Growing Sector

Bank revenues in the United States have been growing in recent months as this data for some large U.S. financial institutions indicates:

  • Bank of America (NYSE: BAC) up $1.12 billion (€1.01 billion) from $80.09 billion to $81.21 billion (€73.19 billion).

  • JPMorgan Chase (NYSE: JPM) an increase of $1.9 billion (€1.71 billion) rising from $93.28 billion (€84.06 billion) to $95.18 billion (€85.77 billion).

  • Wells Fargo (NYSE: WFC) revenue growth of $450 million (€405.53 million), rising from $87.82 billion (€79.14 million) to $88.27 billion (€79.55 billion).

  • US Bancorp (NYSE: USB) revenue growth of $250 million (€225.3 million), from $20.63 billion (€18.59 billion) in June to $20.88 billion (€18.82 billion) in September.

  • Goldman Sachs Group (NYSE: GS) revenues grew by $1.31 billion (€1.18 billion) going from $28.4 billion (€25.59 billion) to $29.71 billion (€26.77 billion).

Nor is it just banks some credit card providers reported growing revenues including:

  • Visa (NYSE: V) revenues grew by $690 million (€621.82 million) rising from $14.39 billion (€12.97 billion) in second quarter to $15.08 billion in third quarter 2016.

  • Mastercard (NYSE: MA) revenues rose by $350 million, rising from $10.19 billion in June 2016 to $10.54 billion (€13.59 billion) in September 2016.

  • Discover Financial (NYSE: DFS) revenues rose by $113 million (€101.83 million) going from $8.833 billion (€7.96 billion) in June to $8.946 billion (€8.06 billion) in December.

  • Capital One Financial (NYSE: COF); which combines the attributes of a bank and a credit card company, saw its revenues increase by $560 million (€504.66 million). Rising from $24.57 billion (€22.14 billion) in June 2016 to $25.13 billion (€22.65 billion) in September.

Then there was the best known U.S. fin tech or financial technology solution provider PayPal Holdings. PayPal saw its revenues grow by $410 million (€369.49 million) between second and third quarters 2016, those revenues went from $10.01 billion (€9.02 billion) in June to $10.42 billion (€9.39 billion) in September.

All this points to a growing U.S. economy because it indicates that more money is being moved around. It also indicates these financial services providers are a value investment because they are generating significant amounts of cash at a time when other sectors are sluggish.

Why is American Finance Doing Well?

Naturally the performance at these U.S. financial institutions raises the question of why they are doing so well. There are several reasons for such success that investors need to consider including:

  • There simply is no other financial industry in the world to match America’s. Europe as economist Xavier Vives argues has no financial institutions to match America’s, neither does China or Japan. Vives thinks Europe needs large regional banks analogous to America’s monster banks such as JPMorgan Chase.

  • The only real competitor the U.S financial sector has; London’s City has been sent reeling by Brexit.

  • Economic turmoil in other parts of the world including Europe and China is driving more capital into the America market generating more money for U.S. financial institutions. This is particularly beneficial to investment banks such as Goldman Sachs which specializes in wealth management.

  • Income inequality in the United States is growing, the number of affluent American is growing and so is their wealth. The Pew Income Study found that the number of people living in affluent households in the U.S. increased from 8% in 2011 to 9% in 2015. Their incomes are also growing, University of California at Berkley Economist Emmanuel Saez calculated that the incomes of the richest 1% of U.S. workers increased by 7.7% in 2015. That means more customers for financial services who have more money.

  • Technology is booming in the United States, creating a new generation of wealthy of professionals and many opportunities for financial services. One of the fast growing financial services companies is PayPal which provides digital wallets, loans, social media payments, payment processing and other fintech solutions. This includes highly-profitable new startups like Uber and Airbnb; which can be thought of as financial services companies. Uber provides financial services by processing payments for ridesharing drivers, Airbnb by processing payments for short-term rentals. These companies have spawned some new financial services companies; including which provides factoring services to Airbnb hosts. Goldman Sachs and other investment banks have been making a lot of money by raising capital for unicorns like Uber.

  • Some of the new fintech solutions such as digital wallets and direct payment are making financial services more profitable. For example banks are now closing hundreds of branches because their customers are banking online and using payment. Bank of America has closed 112 branches this year and Chase has closed 161 branches. This reduces expenses, particularly labor costs and raises profits.

American Financial Services is Generating Income for Investors

The environment looks very bright for the American financial services industry but are these stocks good investments? The answer is yes: many of them provide a good dividend yield and return on equity.

Some highlights include:

  • Discover Financial: a dividend yield of 2.08% on November 2, 2016, and a return on equity of 21.64% on September 30, 2016.

  • Capital One Financial: a dividend yield of 2.2% on November 2, 2016 and a return on equity of 8.12% on September 30.

  • JPMorgan Chase: a dividend yield of 2.7% on November 2, 2016, and a return on equity of 10.47% on September 30.

  • Bank of America: a dividend yield of 1.38% and a return on equity of 6.37%, on the same dates.

  • US Bancorp: a dividend of yield of 2.37% on November 2, 2016, and a return on equity of 14.26% at the end of third quarter 2016.

  • Goldman Sachs Group: a dividend yield of 1.47% on November 2, 2016, and a return on equity of 6.78% for the third quarter of 2016.

  • Wells Fargo: a dividend yield of 3.34% on November 2, 2016, and a third quarter return on equity of 12.78%.

  • Visa: a dividend yield of .69% for November 2, 2016, and a return on equity of 20.98% at the end of third quarter 2016.

  • MasterCard: a dividend yield of .72% for November 2, 2016, and a return on equity of 67.31% at the end of third quarter.

  • PayPal: this stock currently offers no dividend but it had a return on equity of 10.05% at the end of third quarter.

These figures indicate that American financial services might be a good hedge against international economic turmoil. The sector seems to be in recovering and generating income for shareholders.


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