With Bank of America (BAC) and Wells Fargo (WFC) on the ropes and much of the international banking industry in ruins, Barron's Andrew Bary says Goldman Sachs (GS) and Morgan Stanley (MS) are the bank stocks you want to be in:
Look at what has happened on Wall Street. Lehman is gone. Bear Stearns is part of JPMorgan (JPM). Merrill Lynch merged into Bank of America, which bought Merrill for its retail brokerage network, not its institutional business. Citigroup (C) is wounded. Most European banks are on the ropes, including UBS (UBS), which has been scorched by enormous U.S. mortgage losses. A year ago, about a dozen financial heavyweights were scrapping for U.S. debt, equity and advisory business. Now there may be just three committed and deep-pocketed rivals: Goldman, Morgan Stanley and JPMorgan.
Jittery investors seem to believe in the pair's efforts to reduce their risk and remain liquid. They're also not blind to the benefits of $10B each in TARP money, and another $20B in FDIC guarantees that provides them with cheap financing. In appreciation, shares have moved up: Goldman and Morgan Stanley are the only two U.S. banks whose stocks have climbed in 2009 (17% and 58% respectively).
Goldman commands a higher book value ratio than Morgan Stanley (100% to 83%), because it largely avoided the mortgage and real-estate disasters that burned its peers, and because its brass - led by CEO Lloyd Blankfein - is considered savvier. Goldman's investment management arm, once dwarfed by Morgan's, is now larger and more profitable than its rival's which has been battered by mismanagement.
Looking ahead, Morgan is slashing its risk by abandoning proprietary trading and reducing its investments in real estate and private equity - in favor of fee-based revenue such as client services; witness its recent merger with Smith Barney. In contrast, Goldman still believes it has the talent and knowhow to trade prudently and invest in real-estate and other opportunities. Both have solid tangible common equity ratios of about 4.5%, vs. the 3% industry average. And both mark their assets to market each quarter, as opposed to the once-yearly obligatory posting.
- Barron's called a bottom to the bear last week. It's still too early to tell, but after last week's surprising market strength, it'll be interesting to see how much interest their bank call generates.
- Kirk Shinkle wonders whether Goldman might be one of the new Dow components.
- Meanwhile, Tyler Durden wonders what all the banks would look like absent government stimuli - particularly the lucrative and addictive FDIC guarantees.