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5 money-in-the-bank stocks
When the Fed stops raising interest rates, most banks will get a boost. These nimble banks, though, will make money no matter what the Fed does.
By Jim Jubak
This earnings season hasn't been kind to big bank stocks. First, on Jan. 20, Citigroup (C, news, msgs) reported fourth-quarter earnings 2 cents a share short of Wall Street projections; the stock dropped almost 5% on the day. Then, on Jan. 23, Bank of America came up short of Wall Street forecasts by 9 cents a share. That gave a final push to the drop that had taken the stock down by almost 7% since Jan. 3.
But I don't think this is the time to throw all banks out with the bath water, especially with an end to the Federal Reserve's interest-rate hikes finally in sight: The Fed's interest-rate setting body, the Federal Open Market Committee, meets next on Jan. 31.
Instead of buying shares of the biggest banks -- which aren't nimble enough to successfully negotiate the roller coaster that interest rates have been on -- I'd look to smaller banks with carefully defined market niches. These banks have shown themselves able to keep making money even as the spread between short and long rates has narrowed. And thanks to their specialties, they've been able to keep growing deposits -- a cheap source of money -- while adding to their profitable asset portfolios.
The results from Bank of America (BAC, news, msgs) pretty much sum up the problems big U.S. banks face. Competition for deposits has turned fierce, forcing many banks to pay higher interest to attract depositors' cash. At the same time, competition to make new loans has heated up and banks have been forced to trim the interest rates they charge or to offer gimmicks such as low introductory rates in an effort to lasso borrowers. With the spread between short-term rates -- what banks pay to raise money -- and long-term rates -- what banks receive for lending money -- already tight, these competitive pressures have pinched the margins at some banks. At Bank of America, the net-interest margin fell in the fourth quarter of 2005 to 2.82% from 3.18% in the fourth quarter of 2004.
No wonder Bank of America told Wall Street to expect low to mid-single-digit percentage increases in earnings in 2006. That is much lower than the company's long-term goal of 10% earnings growth.
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Compare those results to the numbers turned in on Jan. 20 by a much smaller bank, Wilmington Trust (WL, news, msgs). The company beat Wall Street earnings estimates by 6 cents a share as the bank reported record earnings per share for the fourth quarter of 2005. Net income climbed by 36% from the fourth quarter of 2004 and increased 8% from the third quarter of 2005. For the full year net income grew by 22% from 2004.
Net interest margin at Wilmington Trust climbed by 0.15 percentage points in the fourth quarter of 2005 from the fourth quarter of 2004. At 3.74% net interest margin at Wilmington Trust was almost a full percentage point higher than at Bank of America.
Why the difference? Certainly Wilmington Trust's managers outperformed during the year -- they were simply more adept than the team at Bank of America at handling the interest rate increases from the Federal Reserve that everyone knew were coming. Wilmington Trust moved faster than Bank of America to re-price interest rates on deposits and loans.
But some of the performance difference was also due to the difference in the two bank's strategies. Bank of America tried to be everything to everyone with operations that stretched from credit cards to consumer banking to fixed asset trading. Wilmington Trust concentrates in managing wealth for people with a lot of it to manage. That let the bank gather assets at a fast pace and dodge some of the pressures that have turned the mass consumer banking marketplace into a competitive jungle. Core deposits at Wilmington Trust exceeded $5 billion for the first time and total assets exceeded $10 billion.
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