Hold On to W Holding for Better Days Ahead

One industry that has taken a plunge is Puerto Rican banks.

The highlight would be the stock of Doral Financial (DRL), whose chart resembles the flight of Icarus. I don’t know the full story (I think few do) of what happened to Doral. A few years ago, this was regarded as one of the fastest growing banks in the U.S.

But they got into trouble by overestimating their income from interest only strips, which are the coupons from mortgages dealing only with interest and not principle. They sold them to other PR banks but had an off balance sheet agreement in which they guaranteed payment. Hence these were not true sales and so the accounting was improper.

So Doral went down and had to restate massively and take massive losses. This enveloped most other banks in PR, including R&G Financial (RGF), W Holding (WHI) and others who had to restate but generally by much smaller amounts. Most of their stock charts look similar to Doral’s. Morningstar analyst, Ryan Batchelor, refers to Doral as “toxic waste,” not exactly a glowing endorsement. Yet overall, these banks are all undercovered and shunned by Wall Street.

I am not sure if any of these banks offer great investments, but I suspect that there is gold among the garbage for the enterprising investor who can do his own work. For example, I personally think the best bet may be W Holding. This is a particularly impressive operation. It has among the lowest expense ratios in banking anywhere. The CEO Frank Stipes seems to be a fantastic motivator and quite a visionary.

This bank, perhaps surprisingly, is at the forefront of banking technology. It has been in business since 1958 and has never had a loss. Few banks anywhere can say this. It is well capitalized and pays a nice 3.5% dividend. It is on the lookout for acquisitions both in PR and the U.S. and is not struggling like its weak competitors.

Their main problem seems to be that the yield curve is flat, suppressing their net interest margins. That will someday change and it isn’t really their fault anyway. When this changes the bank will grow very rapidly. I have picked up some shares recently, well below book value (or 1.2 x tangible book including preferreds.)

Disclosure: I hold stock in WHI.

WHI vs. DRL 1-yr chart

Comments

[MagicCJA:]

I definately agree. Back in the early 90's the NYC banks were struggling with diving commercial real estate prices and real estate loans going bad and interest rates much higher than they are now. Just like WHI has insider buying, a long track record, a good market position, and a decent yield, Chase Manhattan had insider buying, a long track record, a good market positon and a decent yield. Chase was selling at $10 per share, way way down from its peak, and it became one of the single greatest investments I ever made. WHI has all of these characteristiics. WHI just reaffirmed the dividend for 2007, so I would suggest that along with the insider buying this is a sign that management and the board still see a bright future. These type of opportunities are just very few and far between for the patient investor.

2007 Feb 21 07:44 PM

[DaveJ:]

Actually the chance to buy banks when everyone thinks the end of the financial system is nigh occurs about every 6-7 years. I keep my Moody's Handbook of Dividend Achievers handy for bathroom reading and often look at the stock charts of banks over the last 20 years. You would be surprised how often you can buy financial services companies and have them double in two years. It happens over and over, even with the same large well know companies. You would hardly have gone wrong if you simply bought financial stocks every time they come close to book value. You would probably be better off if you learned nothing about the companies since the financial news would probably have scared you off. The fact of the matter is that most survive and prosper in just a few years.

Banks and insurance companie are worth more than book value for the simple reason that they can generate leverage on safe bond/loan investments. In other words it makes no sense for anyone young to buy bonds. Just buy AIG and let them buy bonds for you with leverage. In the long run they will grow at about 12-15% and never run into the problem of getting too big.

2007 Feb 26 03:44 AM