Four Banks to Bank on - Barron's 16 comments
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The banking sector has been hit hard over the last year, but there are a few stand-out stocks that deserve a second look, writes Barron's Andrew Bary. Patient investors should check out Northern Trust (NTRS), State Street (STT), JPMorgan Chase (JPM) and PNC Financial Services (PNC).
The KBW Bank index is already down 10% in 2009 and is off 40% since the end of Q3. Some stocks could be getting ready to rally from their depressed levels, but investors need to take a long view, as Q4 results are likely to be poor. Rising unemployment and a weakening economy could make credit problems worse, further hurting banks. Problems with residential mortgages are being compounded by trouble in construction and commercial real-estate lending. With new bank-holding companies on the scene, the competition for deposits is intense.
Despite all this, there are good picks in the sector. Trust and processing banks like Northern Trust and State Street have little credit exposure and trade at historically modest valuations (NTRS at 13 times projected '09 profits, STT at nine times). Northern Trust was recently added to the Conviction Buy list at Goldman Sachs because it has the 'cleanest balance sheet' among trust banks and a strong capital ratio. Goldman analyst Brian Foran's target is $64 vs. Friday's $50.16.
PNC has a stronger-than-average balance sheet and a valuable stake in BlackRock (BLK) worth 25% of its market cap. PNC also 'got a steal in the National City deal' in late 2008 which should bump up earnings. Kevin St. Pierre, of Sanford Bernstein, has a price target of $76 vs. the bank's recent $47.35.
JPMorgan, meanwhile, has seen its shares fall below $26 from a high of $50 in October. JPMorgan isn't immune to credit-card and mortgage woes, but it's attractive now for trading at just a small premium to its tangible book value of $23 a share, and at just seven times estimated 2010 net.
Other ideas for bank bulls can keep an eye on:
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This article has 16 comments:
So many hidden unknowns.
"when moving into good times = buy equities, become a partner in good bsinesses, and when moving into bad times, buy hi quality investment grade BONDS,, be a creditor to good businesses, but not their partner"
My old Northwestern Finance Professor also had sage financial advice.
He said, "When it comes to finance and investing there are only 8 considerations- everything else is mousenuts"
1)Ilegal/ethical Is it ok? -what would mom & dad say if they found out ?
2)How much will my profit be how much?
3)When will I get my return (capital + profit) how soon?
4)How safe my return and my money? how certain?
5)In what form will I get it (cash,equity,goods,ser... how?
6)Tax considerations what's the govt's take?
7) Does it sound too good to be true? how credible?
does it pass the "smell test?"
8)Do you really understand the deal? can you explain it to mom & dad?
He also said, "Never entrust your funds to an individual, better to rely on organizations, as individuals may come and go - Madoff - but the organization remains in place and responsible - Vanguard,Fidelity etc.
How true these words were. They ring more true today than ever. AND we didn't need computers to understand or figure out these financial and economic axioms.
IMO, on this basis I wouldn't touch the banks with a 10 foot poll or a 5% depreciated dollar,
From today's Marketwatch on it's assessment of the current market:
"Financials, whose enormous losses have helped drive S&P 500 earnings for six straight quarters of falling profits, may actually buffer some of the downturn in other sectors" (in the coming weeks).
Tradingmarkets.com comments that Monday may see an upturn in the financials that have been thus ignored.
"Why 'Morgan Barney' Makes Sense
ONE OF MORGAN STANLEY'S key initiatives in the past few quarters has been to reduce its risk profile -- and the rumored talks Friday to merge its brokerage unit with Citigroup's (ticker: C) Smith Barney unit would advance that goal.
It's unclear how such a deal would be structured but it apparently would involve a payment by Morgan Stanley (MS) to Citi in order to give Morgan Stanley a 51% interest in the joint venture and an option to gain full ownership in five years. Such payment could involve several billion dollars because Citi's brokerage business now is larger and more profitable than that of Morgan Stanley.
The retail brokerage business isn't capital intensive, earns high returns on equity even in difficult periods, and doesn't involve big risks like proprietary trading. Morgan Stanley has indicated it's pulling back from that field.
The firm, with more than 8,000 brokers, has been viewed as being below an optimal scale. A deal with Citi for Smith Barney would make Morgan Stanley the No. 1 retail broker with more than 22,000 financial advisors, above Merrill Lynch's 16,000 and Wachovia's 15,000. Morgan Stanley ended its fiscal fourth quarter with 8,400 financial advisors, versus 14,700 at Smith Barney.
A deal for Smith Barney would offer further evidence of the allure of retail-brokerage franchises. Bank of America (BAC) bought Merrill Lynch largely because of B of A's desire to control Merrill's industry-leading retail brokerage business.
A key issue is price. Smith Barney earned $1.3 billion before taxes during 2007. It probably earned less than that in 2008 because of market declines that hurt fee income from wrap accounts. This suggests Smith Barney is worth $8 billion or more, which would be roughly 10 times after-tax income for 2007.
Morgan Stanley's wealth-management unit earned about $200 million before taxes and one-time charges in its fourth quarter of 2008, or $800 million annualized.
Wall Street has been wondering what to make of Morgan Stanley's retreat from proprietary trading since the firm telegraphed that approach in December. Some figured it would put Morgan Stanley further behind rival Goldman Sachs. Morgan Stanley sees it differently, emphasizing a sharp reduction in the size of its balance sheet and higher capital ratios.
A Smith Barney deal would signal the growing power inside Morgan Stanley of co-president Jim Gorman, who is credited with improving the financial performance and assets of the firm's formerly underperforming brokerage business since coming from Merrill Lynch in 2006. If the deal proves a winner, it could make Gorman a front-runner to succeed Morgan Stanley CEO John Mack in 2010, when Mack is expected to retire.
In trading Friday, Morgan Stanley gained 24 cents to 19.06 while Citi shares declined 41 cents to 6.75."
Barron's article by Andrew Bary
"Citi May Book $10 Billion Gain on Morgan Stanley Deal (Update1)
By Bradley Keoun and Christine Harper
Jan. 12 (Bloomberg) -- Citigroup Inc. may book a gain of as much as $10 billion by selling control of its brokerage to Morgan Stanley, helping to replenish capital depleted by the biggest losses in the bank’s history, a person familiar with the talks said.
The pretax gain would come from writing up the value of Citigroup’s Smith Barney unit to a new price set by the deal, said the person, who declined to be identified because the talks are confidential. The gain of $5 billion to $6 billion after taxes would flow into Citigroup’s capital, a loan-loss cushion so eroded that the New York-based bank had to get $45 billion of rescue funds last year from the U.S. government.
“You’re selling out the future to get through the crisis of the present, and unfortunately they don’t have a lot of other choice,” David Trone, an analyst at Fox-Pitt Kelton Cochran Caronia Waller in New York, said in a Jan. 9 interview.
The worst banking crisis since the Great Depression forced Citigroup Chief Executive Officer Vikram Pandit, 51, to abandon his pledge not to sell Smith Barney. For the past decade, the unit has been at the center of the bank’s plan to provide bond- underwriting, savings accounts and investment advice under a single umbrella. Former U.S. Treasury Secretary Robert Rubin, 70, who joined the company in 1999 and had opposed calls to break it up, said Friday he plans to quit the board.
Citigroup spokesman Michael Hanretta declined to comment. Jim Wiggins, a spokesman for Morgan Stanley, didn’t return calls seeking comment.
‘Morgan Stanley Smith Barney’
Talks on the plan to combine Smith Barney with Morgan Stanley’s brokerage in a $20 billion joint venture progressed over the weekend, another person briefed on the talks said. The deal may be announced as soon as mid-week, this person said.
Under the plan being considered, Morgan Stanley would pay $2 billion to $3 billion to Citigroup to obtain 51 percent of a venture that would combine both firms’ retail brokerage arms, people familiar with the plan said.
The new firm, tentatively named Morgan Stanley Smith Barney, would have about 22,000 brokers, exceeding the network created by Bank of America Corp.’s Jan. 1 takeover of Merrill Lynch & Co., which have about 20,000 brokers between them.
Citigroup posted $10.4 billion of net losses in the first nine months of 2008, putting the bank on track to post its worst year since predecessor City Bank of New York was founded in 1812. Beleaguered by writedowns on mortgage-related bonds, losses on commercial real estate loans and costs related to the bankruptcy of chemicals maker LyondellBasell Industries AF, Citigroup probably lost another $5.82 billion in the fourth quarter, Sandler O’Neill & Partners analyst Jeff Harte estimated in a Jan. 9 report.
German Sale
That figure doesn’t include a $4 billion one-time gain that Citigroup expects from the sale, completed last month, of its retail banking operations in Germany. That unit was also sold by Pandit in an effort to free up capital.
Citigroup, which has 352,000 employees and 200 million customers and does business in more than 100 countries, was pieced together through acquisitions during a 17-year span by former Chairman Sanford “Sandy” Weill, who stepped down from a full-time role in October 2003.
Pandit, hired in December 2007 following the ouster of Weill’s handpicked successor, Charles O. “Chuck” Prince, vowed to conduct a “dispassionate” review of Citigroup’s business mix, and whether the company was too big to manage, as some analysts and investors contended. Pandit, who turns 52 this week, concluded that while cost cuts were needed and some assets should be sold, Smith Barney should remain united with the bank’s other operations of branch banking, securities trading and underwriting and payment processing.
Government Help
Pandit told employees on a Nov. 21 conference call that he didn’t plan to break up the company, singling out Smith Barney as a business he wanted to keep. Later that day, the bank’s share price plunged to a 15-year-low of $3.77, and Pandit spent the ensuing weekend huddled in talks with officials from the U.S. Treasury Department, Federal Reserve and Federal Deposit Insurance Corp. over a plan to receive $20 billion of government bailout funds in addition to the $25 billion it had already received, and $306 billion of guarantees on troubled assets.
The decision to sell majority control of Smith Barney is an acknowledgement by Pandit that relinquishing responsibility for the unit may simplify the task of managing Citigroup’s remaining businesses, one of the people familiar with the plan said.
Citigroup had the worst stock performance for two years in a row among large U.S. banks, as measured by the KBW Bank Index. The stock closed at $6.75 on Jan. 9 in New York Stock Exchange composite trading.
‘Right-Sizing’
“There’s a growing dissatisfaction with the slowness with which Citi seems to be dealing with its issues, particularly in terms of right-sizing the company,” said Bert Ely, chief executive officer of banking industry consultant Ely & Co. in Alexandria, Virginia. That requires “not only substantial downsizing of the balance sheet, but also disposing of and selling off activities that are not crucial to its long-term strategy.”
Richard Parsons, 60, Citigroup’s lead outside director, told the Wall Street Journal that the board has confidence in Pandit’s leadership. Parsons may be named later this month to replace board Chairman Win Bischoff, 67, the Journal reported yesterday, citing unidentified people familiar with the plans."
To contact the reporter on this story: Bradley Keoun in New York at bkeoun@bloomberg.net; Christine Harper in New York at charper@bloomberg.net.
Last Updated: January 11, 2009 22:15 EST
I used to trade the banking cycles, but not this one. Every few years the banks used to crash and the media would claim the system was broken, but they always came back. You could find plenty of banks with solid yields and cash flow selling at low ratios with good balance sheets.
The difference between then and now is one word: debt. The balance sheets of most every bank is laden with debt, and now many of them owe the government money -- to boot.
Another problem is, the government needs to let banks fail. There are too many of them, and many are terribly managed. I say this because during the last few years when they had their largest lending speads
ever, they borrowed and borrowed, instead of building their balance sheets for the hard times that always come.
I wish everyone well who dives into the financial dump, and I appreciate the stock touts. But it's a sick area, and I think it'll stay that way for quite a while.
Kind Regards
Disclosure: long positions in AEM(gold) and NXY(oil)
On Jan 12 02:44 AM ArtfulDodger wrote:
> Someone will certainly be able to pick thru the financial trash dump
> and find gold. Not me.
>
> I used to trade the banking cycles, but not this one. Every few years
> the banks used to crash and the media would claim the system was
> broken, but they always came back. You could find plenty of banks
> with solid yields and cash flow selling at low ratios with good balance
> sheets.
>
> The difference between then and now is one word: debt. The balance
> sheets of most every bank is laden with debt, and now many of them
> owe the government money -- to boot.
>
> Another problem is, the government needs to let banks fail. There
> are too many of them, and many are terribly managed. I say this because
> during the last few years when they had their largest lending speads
>
> ever, they borrowed and borrowed, instead of building their balance
> sheets for the hard times that always come.
>
> I wish everyone well who dives into the financial dump, and I appreciate
> the stock touts. But it's a sick area, and I think it'll stay that
> way for quite a while.
On Jan 13 12:57 PM Sa44ron wrote:
> Very patient investors should wait until the banks report increasing
> positive year over year earnings. Then, pick one of the survivors.
> And there are plenty of other things to look at in the mean time.
Bernanke's plans must really be screwed.