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[link to articles.moneycentral.msn.com]
By Jim Jubak
Where there are losers, there are going to be winners.
In my previous column I picked five financial companies that had lost part or all of their competitive edge because of the current crisis in the financial industry.
All these companies -- American International Group (AIG, news, msgs), Citigroup (C, news, msgs), Merrill Lynch (MER, news, msgs), Wachovia (WB, news, msgs) and Washington Mutual (WM, news, msgs) -- will, at best, lose market share to rivals.
Today's column is about the five financial companies that are best positioned to pick up the pieces. Each one is an intense rival of one or more of the five companies so damaged by the meltdown in the markets for everything from mortgages to credit cards to car loans to complex instruments that were supposed to take the risk out of buying debt.
Each one of these winners is going to gain market share at the expense of its challenged competitors. It's pretty easy to pick up business against a competitor that's still firing people, selling off whole businesses and scrambling to find enough capital to keep regulators at bay. The issue for these five winners isn't whether they'll grab market share but how much they'll seize.
My five winners from the financial crisis are ING Group (ING, news, msgs), JPMorgan Chase (JPM, news, msgs), Toronto Dominion (TD, news, msgs), US Bancorp (USB, news, msgs) and Wells Fargo (WFC, news, msgs). I've written about ING, Toronto Dominion and US Bancorp before. All three are members of my 'unfixed-income' portfolio, and US Bancorp is a current Jubak's Pick. But the two others are new to this column.After discussing each of these five, I'll name three other financial stocks that I'd add to this group if things broke in their favor in the near future.
ING
This Dutch bank and insurance company is positioned to pick up the pieces dropped by Citigroup and American International, both internationally and inside the United States. To give you just one glaring example of the way that ING is expanding into markets where challenged competitors are pulling back: In July, Citigroup announced the sale of its German consumer-loan business, with 340 branches and 3.2 million clients. In May, ING announced that it would buy German online mortgage broker Interhyp for about $644 million.
Before the current crisis, I would have identified Citigroup, American International and HSBC (HBC, news, msgs) as the leaders in the race to build dominant global financial brands. Stumbles by Citigroup and American International have thrown the race open to new players.
I think ING is most likely to come out of this crisis as a new member of the global top three. The company already has 75 million customers around the world, and it's making all the right moves to expand that number. About half of ING's business is insurance. In that business, ING has been busy shifting capital from mature West European markets to faster-growing markets in Central Europe and Asia. For example, on July 9, the company received regulatory approval to enter the insurance market in Ukraine.
In the banking part of its business, ING has stepped up its penetration of the U.S. market through its online ING Direct business. ING is an aggressive accumulator of online deposits, with more than $300 billion in online deposits worldwide. In the post-crisis world, raising funds for making loans from relatively low-cost deposits instead of in the capital markets will be a huge competitive advantage.
The company is also going after the lucrative and fast-growing market for managing retirement money. On July 1, the company acquired CitiStreet, a retirement plan and benefit service and administration business. The deal makes ING the third-largest defined-contribution pension business in the U.S., with $300 billion in assets under management. The company's strategy is to make smaller acquisitions of businesses that add to its existing core. In the current crisis, there are likely to be lots of businesses that fit that bill for sale.
(The stock now yields more than $7. Be careful when calculating yields because the company pays dividends twice a year instead of the customary four times.
JPMorgan Chase
It's not that the bank has been managing its business perfectly during the financial crisis; the company admits it made a mistake when it increased its mortgage lending in California in 2007 in an effort to take advantage of competitors' problems.
It's just that JPMorgan Chase's mistakes have been so much smaller and are supported by a much stronger balance sheet. For example, it looks like the charge-offs on its $95 billion home-equity portfolio will peak at about $700 million per quarter. That's about a 3% annual rate. No bank ever likes to take a $700 million charge, but it's surely better to be talking about millions with an "m" rather than billions with a "b."
It's time to write off the rest of 2008, says Jim Jubak. Banks are cutting back on their loans to companies, and without that capital, businesses won't be able to fund operations.And unlike many of its competitors, JPMorgan Chase doesn't have any need to raise new capital. With a Tier 1 capital ratio of 8.4%, the bank has one of the strongest balance sheets in the sector. (A 6% ratio is the minimum to be considered well-capitalized by regulators.) It's that strength that let the bank pick up investment bank Bear Stearns for a song in a deal brokered by the Federal Reserve. That deal moved the bank's investment banking business into new markets.
The bank hasn't ignored its retail side either. The 2007 grab for market share in the most distressed mortgage markets may have increased charge-offs for bad debt, but it increased the bank's market share as well. Net revenue at the mortgage banking unit climbed 46% in the second quarter of 2008 from the second quarter of 2007, and net income climbed 138%.
What's ahead? The bank will use its balance-sheet muscle to pick up the businesses it finds most attractive around the world. On July 25, the bank began talks with National Australia Bank (NABZY, news, msgs) and Banco Santander (STD, news, msgs) to buy and break up deeply troubled United Kingdom mortgage lender HBOS (HBOOY, news, msgs). Right now, JPMorgan Chase can sit back and see what gems the crisis might put into play. Nice position to be in.
Toronto Dominion
The Canadian bank acquired Commerce Bancorp of the U.S. at exactly the right time. Toronto Dominion didn't overpay (the premium on the deal was just 25%, low by the standards of bank deals) because Commerce was coming out of a period of regulatory troubles.
And now, just when deposits are moving back to center stage as the cheapest source of bank capital, Toronto Dominion finds itself owning a deposit-gathering machine. Commerce Bancorp's emphasis on service and convenience has long let the bank pull in deposits at a pace that far outstripped bank industry averages.
The recent decision to rebrand Commerce branches with the TD logo, which the company says it was forced to do by the threat of litigation, isn't a positive. But in the short run, it shouldn't send current Commerce customers running to find another bank. And in the long, run it gives Toronto Dominion, which had acquired BankNorth in 2005, a single brand identity in the U.S. market. With its home Canadian market essentially closed to foreign competition, Toronto Dominion can use the extraordinary profitability of its north-of-the-border operations to fund further expansion in the U.S.
US Bancorp
Here's what I wrote about US Bancorp after the company announced second-quarter earnings: "US Bancorp missed Wall Street earnings estimates by 7 cents a share in the second-quarter results announced on July 15. The disappointment delivered by this very conservatively managed bank is evidence of exactly how deep the crisis is facing the financial sector. Revenue grew by 8% for the quarter, beating Wall Street projections by roughly $20 million. But the company wound up taking charges that reduced earnings 11 cents a share: a $66 million impairment charge for structured investment vehicle securities and a $200 million provision for credit losses.
"My thesis that this conservatively managed bank will be able to grab market share thanks to troubles at other banks remains intact. Total average loans grew by 12% from the second quarter of 2007. Total average deposits climbed 14% for the quarter."
One comment stood out in the conference call: The company said it would conserve capital by reducing its expenditures on buying back shares in order to protect the current dividend of $1.70 a share (the yield on July 25 was 5.86%) and have enough cash to make opportunistic acquisitions in a battered financial industry.
I like that thinking.
Wells Fargo
The bank is now reaping the rewards of keeping its powder dry. The company did add $1.5 billion in the second quarter to its provisions against bad loans, but net charge-offs climbed to just an annualized 1.55% for the quarter.
The relatively modest losses have let Wells Fargo increase its lending just as its capital-constrained competitors have pulled back. Earning assets grew at an annualized 15% rate from the first to the second quarter of 2008 and 20% from the second quarter of 2007. Average total loans climbed 18% from the second quarter of 2007 and at an 8% annualized rate from the first quarter of 2008.
The bank's decision to increase its quarterly dividend by 10% to 34 cents a share was the equivalent of taking out a huge billboard saying, "Hey, we've got the cash to raise the dividend, so we've sure got the cash to lend to you."
Having the cash to lend when other banks don't has let Wells Fargo increase the already hefty difference between what it pays to raise capital and what it collects from borrowers. That difference, the net interest margin, climbed to 4.92 percentage points in the second quarter, up 0.32 from the first quarter of 2008. As of July 25, the stock showed a yield of 4.67%.
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