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The Banking Landscape Is Under Change

The American Banking landscape is under change. As the financial crisis heated up in 2008 we saw many companies loose billions of dollars and some even go under such as the largest bank failure in U.S. history, the Washington Mutual Savings Bank. Shall we call it the changing of the guard or the survival of the fittest? It doesn't really matter, for history will decide for us.

Today there is a gloomy outlook for the financial industry and the economy, but one thing is for sure the change goes on. With Bank of America (BAC) purchasing the storied Wall Street Brokerage house of Merrill Lynch and Wells Fargo's (WFC) purchase of an old southern regional powerhouse of Wachovia Bank, both will take on bigger rolls. Bank of America will be a much bigger player in the brokerage business as well as a major player in the mortgage business with its purchase of the largest independent mortgage company, Countrywide Financial. Wells Fargo will have an east coast presence now that it owns Wachovia with its many branches throughout the south east. Wells to will even be bigger in its real estate mortgage business.

Then there is PNC Financial (PNC) which was a north eastern regional but suddenly jumped into a new roll as a money center bank with its recent acquisition of National City Bank. This gives PNC a larger east coast exposure which will include the the state of Florida who has a huge retirement community. Then their is Bank Branch & Trust (BBT) another North Carolinian bank that has managed to stay out of trouble with its more "Plain Vanilla " bank lending, which it turns out boring can be better after all.

We also have another one of Warren Buffett's stocks U.S. Bank (USB) which also has had higher lending standards than some of its competitors. Suntrust has also remained in the mix but paying some what of a price, by selling some of its Coca Cola (KO) stock, which it has owned since 1919. We can not forget Goldman Sachs(GS) and Morgan Stanley(MS)that were brokerage businesses that have now converted over to chartered banks to escape going under. Citigroup (C) who was once the largest bank might take on a smaller role in the changing of the guard, while JP MorganChases (JPM) purchase of Washington Mutual's assets will give them a much larger retail client base.


Where they stand now:

QuoteYieldPEMktCapRevenue
Bank of America14.049.071270b87,304b
Branch Bank & Trust26.667.03915b7894b
Citigroup6.969.14-38b124,467b
Goldman Sachs83.72.221833b53,579b
JP Morgan Chase30.714.9415115b71,387b
Morgan Stanley 16.446.491417b61,883b
PNC Financial47.875.51317b6166b
Suntrust29.837.21911b10,035b
US Bankcorp24.576.911243b13,136b
Wells Fargo29.654.591599b35,177b

About the author:

Stockmanmarc
Mark's equity focus is identifying secular growth trends, and the companies most likely to benefit from these macro trends. Stocks are identified through fundamental analysis, although basic technical analysis is used in determining entry and exit points. With a degree in Economics from the University of Michigan, a broader understanding of the economy as a whole, along with interpreting investor psychology is also a major interest for Mark. His career background has focused on financial analysis in corporate America. Visit Mark's website at http://www.fundmymutualfund.com/

Visit Stockmanmarc's Website


Rating: 3.4/5 (5 votes)

Comments

Dr. Paul Price
Dr. Paul Price premium member - 5 years ago
And your conclusion is?
alanb9
Alanb9 premium member - 5 years ago
Seems like the conclusion is that the banking landscape has changed. :-)
Dr. Paul Price
Dr. Paul Price premium member - 5 years ago
Duh.
Dr. Paul Price
Dr. Paul Price premium member - 5 years ago
Barrons:

SATURDAY, JANUARY 10, 2009



Not All Banks Are Swimming With the Fishes

By ANDREW BARY

MANY BATTERED SECTORS, INCLUDING CASINOS, retailers and commodity producers, recently have enjoyed sizable upward moves from late-'08 lows. Yet banking is languishing, on fears of more outsized credit losses in 2009. The widely followed KBW Bank index, already down 10% in '09, is off 40% since the end of the third quarter.

Economic waters will remain turbulent this year. But some banks look set to cut through 2009 on an even keel -- and thrive in the calmer seas expected in 2010.

While banks face a difficult year, some stocks could rally from currently depressed levels, including trust banks Northern Trust and State Street ; the well-managed JPMorgan Chase ; and asset-rich PNC Financial Services . Investors may need patience. Fourth-quarter earnings, which start rolling in this week, are likely to be poor, thanks to rising credit losses.

The bull case for buying banks late last year rested on Wall Street's hope that investors would be willing to look past 2009 to a better 2010. Yet rising unemployment and a weakening economy may steepen credit problems for some time yet to come, prompting dividend reductions and forcing banks to raise capital in dilutive share offerings. "The further we are from the end of the credit cycle, the longer it takes to get to an attractive entry point," says Kevin St. Pierre, regional banking analyst at Sanford Bernstein, which cut its '09 estimates for a range of banks last week, citing the weakening economic outlook.

Construction and commercial real-estate lending are proving to be the banks' next problem areas, on top of existing woes in residential mortgages. Once-resilient regions like Georgia, the Carolinas and metropolitan New York are hurting; North Carolina's jobless rate is near 8%.

The usually candid Jamie Dimon, CEO of JPMorgan Chase (JPM), warned that his bank is preparing for a "tough" 2009. Many banks look expensive, based on projected '09 profit, meaning that investors must look out to 2010 to justify current prices. Projected P/Es for 2010 generally are eight to 10, but there's considerable uncertainty about profits.

The problems include intense competition for deposits, partly fueled by newly christened banks like GMAC, which last week advertised a 12-month certificate of deposit for 3.75%, way above the national average of about 2.50%. With the government now invested in many banks via the Troubled Asset Relief Program, pressure may build to boost capital, cutting returns.

The days of 20% returns on equity probably are over, says Gerard Cassidy, an RBC Capital Markets analyst who thinks that low to mid-teens ROE will become the norm when the economy improves.

Table: Some Hidden Strengths in the SectorEVEN AGAINST THAT TOUGH BACKDROP, some banking stocks could do well. Trust and processing banks like Northern Trust (NTRS) and State Street (STT) have little credit exposure and trade at historically modest valuations. Northern Trust, at 52, fetches 13 times projected '09 profits, while State Street, at 43, trades at nine times estimated '09 earnings. Goldman Sachs just added Northern Trust to its Conviction Buy list, noting it has the "cleanest balance sheet" among the trust banks and a strong capital ratio. Goldman analyst Brian Foran's target is 64.

PNC Financial (PNC), based in Pittsburgh, has a stronger-than-average balance sheet and a valuable stake in New York investment manager BlackRock (BLK) worth 25% of its stock-market capitalization. PNC also struck what many view as a very attractive purchase of National City in late 2008. "I think PNC got a steal in the National City deal and that it will be significantly accretive to earnings," St. Pierre says. National City was hurt by exposure to subprime and home-equity lending, but PNC is assuming such draconian losses on the National City portfolio that it probably will do very well from the deal. At 49, it trades at 12 times projected 2009 profits. St. Pierre has a price target of 76.

JPMorgan's shares have fallen to 27 from a high of 50 in October, when investors figured that the bank, under its widely admired CEO, would emerge as a big winner from the credit mess. Since then, it's become clear that JPMorgan isn't immune to credit-card and mortgage woes. Its allure is that it now trades at a small premium to its tangible book value of $23 a share, and just seven times estimated 2010 net. Estimates have been falling for 2009, however; Bernstein now sees the company making $1.80 a share.

Bank bulls can buy the exchange-traded fund SPDR KBW Bank ETF (KBE) based on the KBW index -- now trading around $20, or less than half its '08 high. Its top weightings are in Wells Fargo (WFC), JPMorgan, Bank of America (BAC) and US Bancorp (USB). They account for 30% of the index.

Regional banks, including Comerica (CMA), SunTrust (STI), Synovus (SNV), Fifth Third (FITB), KeyCorp (KEY) and BB&T (MSDXP), have been weak recently because of their considerable exposure to construction and commercial real-estate loans.

St. Pierre likes Comerica, whose shares, at a recent 19, are trading at under 60% of tangible book value, one of the group's lowest valuations. Cleveland-based KeyCorp trades for under $9, and fetches just 70% of tangible book value of $13. Goldman analyst Foran argues that while KeyCorp may operate at just break-even this year, its ratio of tangible equity to assets is a strong 6%. "Absent large losses, we think the stock can trade back toward tangible book," he wrote.

The Bottom Line

While the economy's in for more pain, some banks' balance sheets are sound. Shares worth a look include trust banks, depressed regionals and broad-based ETF.MANY INVESTORS DON'T REALIZE that some "weak" regional banks, including Suntrust, KeyCorp and Regions Financial (RF), look stronger than some major institutions, based on tangible common equity to tangible assets, a conservative capital ratio. These regionals have 6% tangible capital to assets, while Wells Fargo's ratio is near 3%, US Bancorp's is 4% and BB&T's is 5%.

Even with its drop to 24 from 30-plus in September, US Bancorp looks expensive, trading for about four times tangible book value and 13 times projected 2009 profits. BB&T, based in North Carolina, has significant exposure to the weakening Southeastern economy and trades at twice tangible book.

There are risks in buying banks now, clearly. But anyone who buys depressed shares of outfits like JPMorgan, PNC and State Street could see a big payoff in 2010.

roiguy
Roiguy - 5 years ago
Deleted post
lgprice
Lgprice - 5 years ago
i am here to learn, not spread my ignorance to unsuspecting fellow inde-vestors, thanks

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