10 Banks 'Guaranteed' to Survive and Prosper

The credit crisis has hit the U.S. banking industry like a tsunami. Unending waves of write-downs and defaults keep slamming financial institutions.

The government’s response: investing hundreds of billions in the banking sector. It’s provoked outpourings of anger and criticism from just about anyone you talk to. But it looks like it’s working.

Our nation’s collective “investment” in these institutions hasn’t just shored up the unstable banking landscape, it’s given us some clear investment landmarks that will be around for years to come. Here’s how the survivors have been given a distinct advantage - and what the government is recommending you should buy.

U.S. Treasury Performs Bank Triage

When Bear Stearns declared bankruptcy, the financial map changed considerably. Companies once considered “too big to fail” now looked squarely in the crosshairs of insolvency. Regulators quickly opened a “triage” unit to treat the crisis victims. And like any emergency room overloaded with wounded, they couldn’t save everyone.

To be sure, the Treasury Department was going to pick and choose who would receive help based off of merit and marketplace control. And they helped negotiate the buyouts by stronger players of the “bleeding” companies they couldn’t treat.

As a measure of last resort, the U.S. government started to insure certain portions of debt from failing companies being acquired. Their hope was that it would protect the purchasers, and provide motivation to follow through with these rescues.

The greatest concern was that few knew the true extent of the liabilities within these failing firms.

In the midst of the crisis, broker-dealers and investment banks looked at their options and realized that in order to survive this crisis, they would need to add capital or deposits to maintain a positive bottom line. Many chose to merge with traditional trusts, becoming bank holding companies literally overnight.

Now, investment banks made this change as a last resort. Bank holding companies are governed by much stricter rules and regulations than an investment bank is - especially regarding the amount of leverage they can assume and how aggressive they can be with asset valuations. But while this holding company format comes with additional restrictions, these “new banks” also have greater access to government capital and short-term borrowing.

On October 1, Congress authorized U.S. Treasury Secretary Henry Paulson to lend up to $700 billion to get our banks back in the black. The program is called the Troubled Asset Relief Program, or TARP, and gave Paulson immediate access to $250 billion. Within weeks, at least 20 of the nation’s largest banks had accepted funds designed to bolster their finances, expand their loan offerings and shore up their shaky financing.

But unlike the excessive interest rate (LIBOR + 8.5%) and loan repayment requirements imposed upon AIG with its $122.8 billion government injection, the banks were given a sweet deal. Through TARP, banks are able to borrow government funds at only 5% for five years - then jumping to 9% - with the Treasury getting some preferred stock and warrants for its troubles.

And when you compare that to the 10% to 15% required rates of return it would cost for public companies to raise capital on the open market today, those minor government requirements look pretty appealing.

A Buy Signal for Investors

The last time the United States stepped in to rescue private corporations at this scale, it was due to the savings and loan crisis of the 1980s and 1990s. The U.S. Government invested over $324.6 billion to stabilize the thrifts and trusts. But at the end of the day, it was a moneymaker for the taxpayers.

That’s one of the most important things to keep in mind here.

It’s one of the clearest signals that the buyouts and capital injections have given us. And it’s yet to be understood by the market. Henry Paulson and Federal Reserve Chairman Ben Bernanke couldn’t have been more explicit about this message, either. In their two-step process of stewarding bank buyouts and injecting billions of fresh capital into a handful of the largest, fittest financial companies, the federal government has told us exactly where to invest.

They have shown us who the strongest players are, and which firms will not be allowed to fail. Just look at Citigroup (C). It received an additional $20 billion and loan guarantees after its initial $25 billion. The banks receiving bailout funds simply will not be allowed to fail. You’ll be hard pressed to get a better “rubber-stamped” signal for which banks are safe to invest in.

And the timing couldn’t be better.

The last bit of market jitters have sent the banking sector down well below the lows hit in July. This could be the last time we see bargains like this in the banking sector for the next decade. Here are a few of the players best positioned for long-term profit.

Three Banking Titans Emerge

One of the strongest companies to emerge from this credit meltdown is Bank of America Corporation (NYSE: BAC). Already one of the country’s largest banks, BAC picked up Countrywide Mortgage’s $130 billion loan portfolio for $3.5 billion in July. It then followed that acquisition with a government approved buyout of Merrill Lynch in September. That transaction added 17,000 brokers and nearly $1.5 trillion under management for a mere $50 billion.

From these deals, Bank of America got one of the largest IPO underwriting departments, one of the biggest U.S. mortgage companies, a highly profitable global wealth management division, and a majority of the country’s leading investment bankers. These combined assets will place BAC as a major financial player for decades.

At around $20, Bank of America’s stock is well below its 52-week high of $48.58. And even after slashing their dividend to increase cash liquidity, it’s still giving investors almost a 6% yield. With $719.8 billion the largest amount of total U.S. deposits, Bank of America is the dominant national player in the banking and financial services sector.

But they’ll face some steep competition from the country’s second-biggest bank, heavyweight Wells Fargo & Company (NYSE: WFC).

Wells is in the process of picking up a majority of now defunct Wachovia’s assets. The combined company will have the most bank branches in the United States with 6,779. This brings their total U.S. deposits to $711.5 billion.

As a bonus to the $15 billion buyout, Wells Fargo will be able to use Wachovia’s prior losses as a tax deduction to offset income. Shareholders will be able to benefit from reduced tax expenses for years to come.

Another financial titan, JP Morgan Chase & Co (NYSE: JPM) was able to step in and buy another famed Wall Street institution for virtually pennies on the dollar. In March, the Treasury approved its buyout of Bear Stearns and guaranteed up to $30 billion of their less-than-liquid assets.

JPM’s next acquisition was picking up mortgage giant Washington Mutual for only $1.9 billion. It received virtually all of WaMu’s assets, including a $250 billion mortgage loan portfolio, which has helped JP Morgan increase its total U.S. deposits to $649.3 billion.

All three of these banks have brand new $25 billion credit lines from the U.S. government, and should be expected to use them heavily. But these aren’t the only three banks looking to benefit, and they aren’t the only ones getting fresh funding.

The list of regional banks receiving federal cash includes quite a few opportunities:

Company	Ticker	Government Investment
Citigroup	C	$25 billion
PNC Financial Services Group	(PNC)	$7.7 billion
Capital One Financial Corp	(COF)	$3.55 billion
Regions Financial Corp	(RF)	$3.5 billion
Suntrust Banks Inc	(STI)	$3.5 billion
Fifth Third Bankcorp	(FITB)	$3.4 billion
Keycorp	(KEY)	$2.5 billion

These seven companies are putting a combined $49.15 billion of taxpayers’ investments to work, making new investments and buying up their competition. If our nation’s history of government bailouts holds true, these capital investments should be profitable ones. And they can be for you, too, if you pick up a few shares of these rubber-stamped banks.

Comments

[Roger C. Wren:]

BAC is 13 dollars a share not 20. Pretty good article otherwise.

Jan 12 03:44 AM

[CAPT GW:]

Why not USB or WBK? My read is that they are "tbtf" and relatively well run leaders in their respective markets.

Jan 12 09:51 AM

[Stewie:]

I just don't get it at all, FITB has been tanking since 2002, long before the current mortgage/credit markets began their nosedive. What on earth would make you think they will bounce back and prosper when they clearly have both a flawed business model and a foot print from hell ? Did you do any research at all ? Did you just throw names in a hat ? FITB had already borrowed more than 4 billion in the last two years prior to the TARP money. It didn't do anything for them, why would a government loan suddenly overcome bad management ?

Jan 12 10:08 AM

[benevolent ...:]

debt to income ratio-highest I've seen going back 110 years for the nation as a whole. The banks can not lend more until the debt is reduced or incomes are increased. If incomes are increased by the governments efforts of increasing liquidity then thoes debts are paid with cheaper dollars thereby upsetting the banks profits and balance sheets. If debt is reduced without adding liquidity then opportunity costs the banks by the drop of GDP-less business activity. Where is the fundamental reasoning that bank stocks will have good value now or in the 5-year future?

Jan 12 11:13 AM

[MistaWhite:]

I saw something pretty interesting the other day if this goes to show banks need help. I was looking at purchasing something using my Best Buy credit card to take advantage of the 3 year no-interest offer they had. I haven't used my card in several months. Well, I logged online and was surprised that my credit limit showed $304. It used to be around $5k. I called them, and they said with the new economy that a person has to use their account every 120 days or they will snap up your credit line or cancel your card.....are they that short of money to lend? I decided to pay cash instead.

Jan 12 12:34 PM

[Timmothy Posey:]

I would not put Citi (C) in the group of guaranteed not to fail. They are selling off their most profitable units, which one can easily speculate that the government is silently forcing their breakup.

Jan 12 05:24 PM

[Richard Raia:]

Sorry to say, I completely disagree with your story. You should lighten up, using the word “ Guarantee “ Some of these Bank stocks you mention will not be around by the end of this year….no doubt..!!

Jan 12 06:11 PM

[dawase@gmai...:]

This article is intensely flawed. Most of these banks will continue to write down the "asset" portfolios this year and there's a big question about survival. Look at retail and the coming implosion in commercial real estate. Who do you think securitized and financed all that garbage? No doubt there will be a banking system in a year or two, but what it looks like and who the players will be is anyone's guess.

Citi is the perfect example. Selling the brokerage arm for $3.5B doesn't suggest they're selling out of desire because the price is so good. They're selling it out of need. In fact, the word on the street is that the Treasury told them to cut a deal. Know what that means? Even the Treasury is wary at this point of pushing more money at the original recipients (or C at least).

The new suggested restrictions for the second half of the TARP will effectively neuter any financial co that takes a handout. Minimal dividends will send any yield-seeking investor running for the exits. In fact that may be what drove the weakness today.

Look at the massive spike in put volume today on HBC which, thus far, has had fewer problems. Look at JPM today. Weaker than the overall market by a mile. At the very least you should look at something like the financial preferreds since 85% are financials anyway. At least you're higher in the capital structure and are more likely to get paid to wait.

I hate to say it, but I think this article borders on dangerous.

Jan 12 11:12 PM

[Lilliana:]

COF.?
At what cost to the Shareholders,the Mortgage holders, the Government and investors..?
The people in COF are....
Without exception are the most difficult /dumb banking outfit we have ever had to deal with..however, do your own D.D.

Jan 13 05:41 AM

[User 336336:]

Have you no idea just how much toxic debt and "writedowns" are still in the pipeline?

Some of these banks are going to disappear. This year. If Citi survive there next big writedowns, I might take a flyer on them at 50 cents a share. But I wouldn't expect to get my money back in less than 5 years.

Jan 13 08:51 AM

[Chuch:]

I wouldn't put any of my money on banks, look at all the debt still out there crashmarketstocks.com

Jan 13 01:33 PM

[oldgoldbug:]

Bear Stearns declared bankruptcy? Did I miss that? I thought JPM gobbled them up.
Gotta agree with Lilliana - COF really stinks and HBC is right there with them.
Chartwise, I wonder if BAC (10.61) and C (5.91) are going to make it - they look like they are on life support. The amount of stock being unloaded is remarkable - some pretty big players are spooked.

Jan 13 03:27 PM

[User 265729:]

All of these banks will be around as long as Bernanke can get $400 billion or so a quarter to hide the fact the banking system has been totally insolvent since Sepember/October 2008. When the goverment can't support Bernanke's habit it's show over folks.

Traders even have a name for the sudden rise in stocks just before the bell. They call it the Bernanke Bump.

Jan 13 08:01 PM

[User 265729:]

You state:

"The government’s response: investing hundreds of billions in the banking sector. It’s provoked outpourings of anger and criticism from just about anyone you talk to. But it looks like it’s working."

But Bernanke stated today, at the London School of Economics, that it's not working and he needs more $$$$$$$$$$$ [...infinite set].

If you get near financials expect to get your hands burned.

Jan 13 08:13 PM

[nyka:]

BAC's share price is around $20? In what century was this article composed? Wow! Nothing like being accurate. With that kind of sloppy "research," this guy's "guaranteed" best bets are worthless; make that totally worthless.

Jan 13 09:16 PM

[davidbdc:]

Nationalize C and BAC and any other institution getting multiple handouts. Wipe out the equity holders and bond holders. Buy financials at your own risk - no more bailouts - only BK!!!

Jan 18 06:39 AM