By James B. Stewart, Smartmoney | 16 September 2008
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There's no doubt that the sector is facing some of the most difficult conditions in memory. This summer's collapse of IndyMac Bancorp set off multiple bouts of near-panic selling. But the widely feared rash of bank failures hasn't materialized. To the contrary, the banking system as a whole seems fundamentally healthy[!?!] Richard Bove, the respected banking analyst at Ladenburg Thalman, concluded after IndyMac's collapse that "the system is not anywhere near the danger that existed in the late 1980s and early 1990s" after the savings-and-loan debacle. [[No, indeed! It's in far, far worse danger.: normxxx]]
Now that second-quarter [2008] earnings have been digested and banks have further written down their bad loans and other nonperforming assets, better visibility is beginning to emerge. Worries over the housing market remain a serious drag on the sector. But I have no doubt that eventually financials will recover— and we're much closer to that point now than a year ago. [[Forget that last!?!: normxxx]] When the recovery really kicks in, and these beaten-down stocks soar, I want to have already added to my positions. [[Well, the 'early bird' may catch the worm. But, what if you're the 'early worm'?: normxxx]]
The good news for investors is that the entire sector has lagged— the good banks along with the battered bad. To me, this signals a potentially historic opportunity for calmer, long-term investors, especially those who focus only on the strongest, best-capitalized banks. Not only will these banks be the survivors of the current crisis, but they'll also be in a position to take advantage of the weakness of many of their competitors, buying assets on the cheap to grab market share. I consider this to be a low-risk strategy. Leave Fannie (FNM), Freddie (FRE) and WaMu (WM) to the speculators. I want a solid, long-term investment I don't have to lose sleep over.
So who are the best candidates? In a report this summer, Bove drew up a list of potentially troubled banks that garnered him considerable attention (and a lawsuit). But I was interested in the other end of his ranking spectrum: the banks so well capitalized, with such high-quality assets, that they posed almost no risk of failure.
To pick winners, I used an approach adapted from Bove's research. With SmartMoney research assistant Tyler Hill, I looked at nonperforming assets, as disclosed in the banks' public filings, and divided them by the sum of their shareholder equity and reserves against losses. The resulting ratio is a measure of the strength of banks' balance sheets, with a lower ratio indicating greater strength. We considered anything below 5 percent to be exemplary— banks with few nonperforming loans and a healthy cushion of capital.
Some of the banks on our honor roll are primarily asset managers and custodians, focusing on institutional clients. They don't do any mortgage lending, so they avoided the worst of the subprime blowup. Others are in some of the few geographic areas (like New York City) that haven't [yet] experienced the worst of the real estate decline. Here are a few finalists that I found especially promising:
NORTHERN TRUST (NTRS)
26 December 2008: 49.27
Name a venerable midwestern family or institution (including DePauw University, my alma mater) and chances are, its assets are here. You won't find any drive-in banking windows at Northern. It caters to super-high-net-worth individuals and families. Its seemingly stodgy business model has stood it in exceptionally good stead. Its bad-assets-to-capitalization ratio is a minuscule .67 percent— you can't get much safer than that. Meanwhile, Northern has beefed up its international presence with the acquisition of London-based Baring's wealth management unit.
Northern's stock was trading late this summer at $79, only $2 off its 52-week high. But its price-earnings ratio was under 18, well below its average of 21. I expect it to move to a premium as customers flock to its rock-solid balance sheet.
(2/7/2010 Price: ~$50) (1/28/2010) Stockpickr: "Caution is still warranted, but the correction might just run its course if the earnings continue last week's pattern".— Jim Cramer
Almost every industrial and tech company that reported showed great growth vs. expectations. Most noteworthy were the banks like State Street (STT), Northern Trust (NTRS), Bank of New York (BK), Goldman Sachs (GS) (ouch!), Fifth Third (FITB), Huntington (HBAN) and Comerica (CMA).
(2/1/2010) Citigroup analyst Greg Ketron upgraded the trust bank to buy from neutral. Citi also reiterated its buy recommendations on rivals State Street Corp. (STT 43.35) and Bank of New York Mellon Corp. (BK 27). "Signs of stabilization in revenue headwinds combined with excess capital positions, strong capital generation, and improving market and economic conditions support our bullish view and the lowering of our risk rating for the group to medium from high," Citi said in a note.
SVB FINANCIAL (SIVB)
26 December 2008: 24.41
I first encountered SVB, the holding company for Silicon Valley Bank, earlier this year when I wrote about the scandal over auction-rate preferred securities. I lauded SVB for spotting the danger and getting clients out of these assets before the market froze. It turns out this foresight was not an isolated event. SVB reduced its nonperforming assets during the credit crisis to under $10 million.
SVB focuses on clients in the leading industries in its home territory: technology, life sciences and (this being California) wine. Its specialty is in start-up and emerging companies, and to a certain extent its fortunes rise and fall with the venture capital and private equity sectors, which have been in the doldrums. Still, at $57, shares were just below their 52-week highs.
(2/7/2010 Price: ~$41) (1/20/2010) Cantor Fitzgerald Initiates Coverage on SVB Financial Group (SIVB) with a Buy; J.P. Morgan Upgrades SVB Financial Group (SIVB) to Overweight. Cantor Fitzgerald initiates coverage on SVB Financial Group (Nasdaq: SIVB) with a Buy rating and a target price of $55.
Cantor analyst says, "We regard SVB Financial as having a unique franchise with unique growth opportunities, many related to the venture capital industry. With venture capital (including IPOs) coming off a bottom and looking to rebound, SVB Financial's earnings also appear to be poised to grow strongly, with very little real estate risk (unlike most small-cap banks)...With regard to credit quality, (a) SVB Financial has almost no real estate risk (unlike most small-cap banks), (b) its riskiest asset class (loans to early-stage companies) now accounts for only 12% of total loans, and (c) SVB Financial appears to us to be well-reserved, with a large total loan loss reserve (2.1% of loans) in relation to its low level of nonperforming assets (1.6% of loans, or 135% coverage)...Our 2011 EPS estimate is $3.22."
THE BANK OF NEW YORK MELLON (BK)
26 December 2008: 26.27
Argus: With the sale of its retail bank operations to JPMorgan Chase (JPM) and its acquisition of Morgan's corporate trust business, the company is now the largest custodian bank in the world, with over $16 trillion in assets. The merger of Bank of New York and Mellon, completed in 2007, should yield considerable cost savings. This bank has more nonperforming assets than our other finalists, but it also boasts nearly $6 billion in total cash reserves. Chief Credit Officer George Malanga says the bank has already exceeded its targets for reducing its exposure to risky loans.
At $37 late this summer, the bank was trading well off its 52-week high of $50. This may well reflect investor concerns over a pending $22.5 billion money-laundering lawsuit against the bank by the Russian government. The case is being tried in Moscow, and given the state of the Russian judiciary and Russia's recent heavy-handed treatment of foreign investors, it's anybody's guess how this will turn out.
(2/7/2010 Price: ~$27) The Bank Of New York Mellon Corporation (BK) Maintains Buy Rating: Posted on 01/27/10 by Ed Liston
Argus has maintained its Buy rating for The Bank of New York Mellon Corporation (NYSE: BK) with a 12-month price target of $35. The Bank of New York’s stock price has been hit in recent months by losses in its investment portfolio, according to Argus. The company has finally resolved the issue with a large change to earnings in the third quarter. The Bank of New York now has just $1.2 billion of unrealized losses [remaining] in its portfolio.
With this, investors will expect The Bank of New York to deliver consistent growth in its top-line. Argus has a cautious view on this issue as it believes 2010 will be difficult year for the company to achieve strong growth. Argus expects The Bank of New York Mellon to grow 7% in 2010 and by 15% in 2011. The company remains strong in its core business of asset management with positive inflows to its funds.
UMB FINANCIAL (UMBF)
26 December 2008: 44.89
UMB is the highest-scoring traditional bank among our favorites. Based in Kansas City, Mo., the holding company oversees 135 banking centers in the Midwest and Southwest and holds less than $10 million in bad loans. UMB acquired a Colorado bank this summer and said it will use its strong balance sheet to pursue similar opportunities. Its asset quality is reflected in a relatively high P/E ratio of 24, and at $57 the stock was close to its 52-week high. Still, the company's double-digit earnings growth through the worst of the credit crisis should make it the envy of the banking industry.
Other large, diversified banks that didn't get our top scores but still boast healthy balance sheets[!?!] and low ratios[!?!] include Bank of America (BAC), Regions Financial Corp. (RF), U.S. Bancorp (USB), JPMorgan Chase and PNC Financial Services Group (PNC). As with all financial companies, there's a risk that nonperforming assets will grow as the real estate and credit crises unfold. But these companies deserve credit for resisting the excesses that ensnared their competitors— and they merit a second look from investors.
(2/7/2010 Price: ~$38) (02/01/10) Price crossed below 50-day moving average. UMB Financial Corp: Stock Rating Summary (MSN StockScouter Rating=8; 10 is the best possible rating.) UMB Financial Corp, a mid-cap growth company in the finance sector, is expected to outperform the market over the next six months with less than average risk. Pro: An executive, director or major shareholder purchased a small number shares recently => Positive/ Neutral. Shares are under heavy accumulation by financial institutions => Positive for large company like UMBF. The price-to-sales multiple is slightly higher than the average for all stocks in the StockScouter universe => Positive/Neutral for a medium- to large-sized company like UMBF.
Con: The StockScouter measure of relative price change and consistency is low => Negative.
M O R E. . .
Normxxx
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