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<<< Click here for Part I

When evaluating the current state of the U.S. Banking industry an old Wall Street adage comes to mind: Sometimes the bulls win, sometimes the bears win, but the pigs never do. During the last decade, which today is often referred to as the “lost” decade, banks and other financial institutions deviated from their traditional conservative roles in favor of a greedy quest for non-traditional and seemingly easy profits. In the end, they got the very opposite of what they desired.

Keep in mind our once stoic and staid financial institutions do not bear all the blame. Government oversight, or rather the lack of it, contributed greatly as well. There are valid reasons for conservatism in banking and lending that should never have been loosened or violated. Hopefully, the best lessons are hardest learned, and a return to its roots are in the cards for this important industry.

Ironically, one institution at least, held true to banking tradition and profited handsomely. Hudson City Bancorp, Inc. (NASDAQ:HCBK) maintained conservative, traditional banking practices and grew earnings while competitors suffered large losses. Perhaps the rest of the industry, as well as the government, should take note. Sound and prudent practices can be very profitable, and most importantly, sustainable.

Utilizing our Fundamentals-at-a-Glance research tool, we contrast Hudson City Bancorp, Inc. against a broad universe of banking institutions. From large money center banks to thrifts, note what happened to their profits, and capital structures. The catastrophic destruction of market value was mostly justified as earnings collapsed (green line with white triangles).

Our first example is our featured company Hudson City Bancorp, Inc. Even though, thanks to their conservative practices, their profits actually grew; stock price fell in sympathy with their peers.

Figure 1a. EPS Growth correlated to Price

Figure 1a. HCBK EPS Growth correlated to Price

Figure 1b. Dividend and Price Performance

Figure 1b. HCBK Dividend and Price Performance

As you examine the following financial institutions (figures 2a, b through 11a, b), note the correlation between price (black line) and earnings (green line with white triangles). Once you see this correlation, the importance of earnings cannot be denied.

Figure 2a shows Regions Financial (NYSE:RF) a Southeast Bank, experienced a collapse in earnings from a $2.38 to a loss of $.98. Stock price justifiably followed earnings down.

Figure 2a. EPS Growth correlated to Price

Figure 2a. RF EPS Growth correlated to Price

Figure 2b shows that Regions Financial was forced to reduce their dividend as earnings faltered.

Figure 2b. Dividend and Price Performance

Figure 2b. RF Dividend and Price Performance

Figure 3a shows that M&T Bank (NYSE:MTB) a Northeast Bank, also experienced a sharp drop in earnings. However, they did remain profitable. Stock price justifiably followed, but has partially recovered in line with earnings.

Figure 3a. EPS Growth correlated to Price

Figure 3a. MTB EPS Growth correlated to Price

Figure 3b shows that M&T Bank was able to maintain their dividend based on positive profitability.

Figure 3b. Dividend and Price Performance

Figure 3b. MTB Dividend and Price Performance

Figure 4a shows that New York Community Bancorp, Inc. (NYB), a Savings & Loan, experienced some earnings deterioration. Note how stock price tracked earnings.

Figure 4a. EPS Growth correlated to Price

Figure 4a. NYB EPS Growth correlated to Price

Figure 4b shows that New York Community Bancorp, Inc. held up better than most traditional banks. Note that they did modestly reduce their dividend in 2005 and have not raised it since

Figure 4b. Dividend and Price Performance
Figure 4b. NYB Dividend and Price Performance

Figure 5a shows that Huntington Bancshares (NASDAQ:HBAN), a Midwest Bank, experienced a severe collapse of earnings. This led to a severe drop in stock value as well.

Figure 5a. EPS Growth correlated to Price
Figure 5a. HBAN EPS Growth correlated to Price

Figure 5b shows that shareholders of Huntington Bancshares suffered large losses. Huntington Bancshares was also forced to slash their dividend.

Figure 5b. Dividend and Price Performance
Figure 5b. HBAN Dividend and Price Performance

Figure 6a shows that Sterling Financial Corp. (NASDAQ:STSA), a Washington State Savings & Loan suffered severe losses during the recession.

Figure 6a. EPS Growth correlated to Price
Figure 6a. STSA EPS Growth correlated to Price

Figure 6b shows that Sterling Financial Corp. shareholders were devastated.

Figure 6b. Dividend and Price Performance
Figure 6b. STSA Dividend and Price Performance

Figure 7a shows that SunTrust Banks, Inc. (NYSE:STI), a Money Center Bank, saw earnings collapse into large losses.

Figure 7a. EPS Growth correlated to Price
Figure 7a. STI EPS Growth correlated to Price

Figure 7b shows that SunTrust Banks, Inc. shareholders suffered devastating losses. SunTrust Banks, Inc. was also forced to slash their dividend.

Figure 7b. Dividend and Price Performance

Figure 7b. STI Dividend and Price Performance

Figure 8a features Citigroup Inc. (NYSE:C), a worldwide recognized Money Center Bank whose earnings collapse was startling. Citigroup’s stock price followed suit.

Figure 8a. EPS Growth correlated to Price
Figure 8a. C EPS Growth correlated to Price

Figure 8b shows that Citigroup shareholders saw their investment collapse. Citigroup also cut their dividend in 2008.

Figure 8b. Citigroup Dividend and Price Performance
Figure 8b. C Dividend and Price Performance

Figure 9a shows that another Money Center Bank, Wells Fargo & Co.’s (NYSE:WFC) earnings faltered, but they at least remained profitable. Wells Fargo & Co. shareholders saw their stock value drop then recover as profitability began to recover.

Figure 9a. EPS Growth correlated to Price
Figure 9a. WFC EPS Growth correlated to Price

Figure 9b shows that Wells Fargo & Co. shareholders ended with a modest profit. However, weak earnings forced a dividend cut.

Figure 9b. Dividend and Price Performance
Figure 9b. WFC Dividend and Price Performance

Figure 10a reviews Bank of America, Corp. (NYSE:BAC) another high profile Money Center Bank that saw earnings collapse. Stock price responded to the earnings fall.

Figure 10a. EPS Growth correlated to Price
Figure 10a. BAC EPS Growth correlated to Price

Figure 10b shows that Bank of America, Corp. shareholders suffered large losses and the almost virtual elimination of their dividends.

Figure 10b. Dividend and Price Performance
Figure 10b. BAC Dividend and Price Performance

Figure 11a looks at Washington Federal, Inc. (WFSL) another Washington State Savings & Loan. Although earnings faltered, the company at least remained profitable.

Figure 11a. EPS Growth correlated to Price
Figure 11a. WFSL EPS Growth correlated to Price

Figure 11b shows a modest return for Washington Federal, Inc. shareholders but a substantial cut in their dividend.

Figure 11b. Dividend and Price Performance
Figure 11b. WFSL Dividend and Price Performance

Conclusion

What we have shown here is a cross-section of the banking and savings and loan industry and the effects that the relaxation of banking standards had on their businesses. The damage to their capital structures and increased government involvement and oversight has permanently changed this industry. Therefore, our traditional ways of analyzing businesses in this industry must change as well.

We believe it’s important and prudent to not paint an entire industry or a company within that industry with the same brush. On the other hand, the banking industry in general is universally facing dramatic changes and Federal scrutiny. Therefore, future profitability is a big question mark at this juncture, in our opinion.

Consequently, investments in this important industry need to be evaluated from the new perspective. In general, these are not the conservative investments they once were. However, we believe there is opportunity within the rubble. Careful analysis and scrutiny is the call of the hour regarding investing in banks. Choose wisely.

Most importantly, this review dramatically validates the importance of earnings to shareholder returns in the long run. Both capital appreciation and dividend income are a function of earnings and are ultimately derived from business results.

Disclosure: Long HCBK at time of writing.

Source: Hudson City: A Bank You Can Bank On (Part II)