Starting with this last article, we had begun reading about the leading banking and financial services stocks of America along with comparison of certain pretty small but fundamentally strong companies in the sector. We had a thorough scan of Wells Fargo (WFC), Bank of America (BAC) and Rurban Financial Corp. (RBNF) therein. Banking and finance will always remain important for the economy, whether in bad times or good. Therefore it is in our interests to know the ins and outs of companies in the sector, both big and small.
Fifth Third Bancorp:
Founded in 1862 and headquartered in Cincinnati, Ohio, Fifth Third Bancorp is a diversified financial services holding company in the United States of America. With around $117 billion in assets, the company functions through 15 affiliates which have 1316 full service Banking Centers (including 105 Bank Mart locations open seven days a week inside select grocery stores) and 2425 ATMs criss-crossing 12 states in the South-Eastern and Mid-Western United States including Ohio, Kentucky, Indiana, Michigan, Florida, Illinois, Tennessee, West Virginia, Pennsylvania, Missouri, Georgia and North Carolina.
The Bancorp has its feet dug deep across four major segments, i.e. Commercial Banking, Branch Banking, Investment Advising and Consumer Lending. Besides, the company has a 39% stake in Vantiv Holding, LLC which in turn is a major payment-processor in the country. Fifth Third, having assets of about $300 billion under its management ($26 billion of which caters to corporations, not-for-profits, as well as individuals), therefore also has the honour of being among the largest managers of money in the Midwest.
Being focused on understanding the needs and longer-term business goals of its clients and acting on them supposedly makes FITB to work closely with the clients and churn out a fine mix of precise-financing and services for them and in-turn helping them grow. The company values businesses both large and small and believes they play vital role in stimulating the economy in general along with the local communities. This thought is reflected in the bank's recent extension of new and renewed credit to businesses between July and September of 2012, while in the first nine months of the year it has already lent out over $20.5 billion to businesses across the length and breadth of its operational areas.
Third quarter results (just out) reaffirm our trust in this solid stock. FITB's revenue, earnings growth, net income growth, EPS growth and high margins have been above industry average and in some cases beat S&P500 levels in the year till now. Positive EPS growth has been seen continuously over two years, and is poised to continue.
Yes, cash flow is a little on the weaker side riding on slightly lower revenue this quarter because of certain essential charge-off expenses, but many present strengths including ever increasing and high profit margins, growth in EPS, net income (both interest and non-interest) along with a rock-hard stock-price achievement and good quality of credit make this FITB stock a cherished-diamond to invest in.
Provider of products and services to a range of customers including individuals, corporations, financial institutions, and governments, Morgan Stanley is a global holding company and operates various subsidiaries in the financial-services sector. Morgan employs over 59,500 souls and gets its work done through over 1300 offices in about 43 countries. Headquartered in New York and founded in 1935, this company has its wings spread over operations which can be segregated into three general segments, i.e. Global Wealth Management, Asset Management and lastly Institutional Securities. Through these segments Morgan Stanley provides an array of services and products which include the following:
- Financial-advisory and capital-raising for corporate and institutional clients worldwide.
- Fixed income, equity and alternative investments and merchant banking services.
Banking and finance sector has seen a lot of consolidation, and that heats up the competition for Morgan Stanley resulting in intense pricing-competition and this trend is here to stay. Also, god-forbid another financial down-turn has to be faced, then MS does not have the required insulation to absorb that, which poses a risk. The real-estate exposure of Morgan is also pulling its performance down because of a bad market. Bad performance is bad rating, further jacking up its cost of funds. Requirements of tier 1 capital ratio of 7% will add to the tightness in the short to medium term.
Looking at the positive side, post the economic-crisis period, being fairly diversified in terms of its span on markets as well as portfolio of products, this company has stood up strong enough. Further, unlike and contrary to many other banking and financial companies which faced the heat of the Euro-Crisis, MS plans to grab the opportunity to gain additional market-share through its Global Wealth Management arm. Also, the company's massive restructuring strategy to make itself leaner and more efficient to deal with the un-favorable scenarios and impact of stringent regulatory policies will, in time, give it strength and make it more competitive. Clearing of the March, 2012 stress test and approval of the Smith Barney joint venture will go a long way in steadying its revenues. MS has during the third quarter made a strategic decision and bought back 14% share of Smith Barney from Citi which will certainly auger well in the longer term. Also divestment in non-profitable and non-core businesses will add a lot of pluses. The company is also focusing on continuous inorganic growth to strengthen its performance. Third quarter results are not all that discouraging if we take into account all facets and strategic actions being undertaken by MS.
Morgan Stanley is currently in more of a transformation stage wherein it is taking a lot of steps to stay afloat and become efficient in the longer term for which its current performance may be getting hampered. But in the long term, as an impact of the strategic actions taken today, this financial services giant will come up stronger, leaner and deliver adorable results. (latest results can be found here.)
Mercantile Bank Corporation:
Mercantile Bank Corporation, founded in 1997, is headquartered in Grand Rapids, Michigan. A holding company for Mercantile Bank of Michigan, it is a provider of banking services to small / medium sized businesses, individuals, as well as to governmental institutions. Spread over seven offices in Grand Rapids, Holland, and Lansing areas of Michigan, besides having seven automated teller machines.
The areas of services range from provision of secured and unsecured commercial / construction / mortgage / consumer loans, and acceptance of checking, savings and time deposits. Customers can conduct certain loan and deposit transactions by telephone and personal computer. Courier service is provided to certain commercial customers, and safe deposit facilities are available too. Besides, it also deals in private passenger automobile, homeowners, personal inland marine, boat owners, recreational vehicle, dwelling fire, umbrella policies, small business, and life insurance products.
Repurchase of half of its TARP shares through internally-generated cash flow and without the need to access outside capital instills confidence in the company, further to its solid performance in its sphere especially with respect to reduction in non-performing assets.
In a gist, MBWM combines the advantage of the following facets which relate to its outclassing the S&P500 and its peers:
- A 'charging' stock price performance;
- Net income growth;
- Satisfying return on equity;
- Growing profit margins;
- Magnificent earnings per share growth history.
These strengths clearly outweigh the fact that the company trails with a somewhat weak operating cash flow.
An OUTPERFORMER, the MBWM stock is, as an investment in the longer term, certainly a BUY (if one does not hold it yet) and a HOLD (for one that already owns this stock) because of its sheer performance as well as the fact that it is pretty well undervalued and holds a lot of inherent value. Further, it is also a highly rated ALPHA (risk-adjusted) stock.
Note on Sources: This article would not have been as informative as it is had I not researched a variety of facts and material on a variety of websites and other resources, the major ones being Yahoo, Google, Nasdaq, amongst others. A big thank you to all of them for the relevant matter and guidance indirectly charging my analytical thought-process.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.