Large Financial Institutions: Profits Over Friendship

By Meryl Baer - September 25, 2012 | Tickers: AXP, DFS, MA, V | 0 Comments

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Large financial institutions are not our friends. They want our business, soliciting us with sweet talk and endless junk mail, urging us to sign on the dotted line.  People think the nice person talking to them across the table, or on the phone, really cares about them. So they shake hands and take out a car loan or home equity line of credit. But miss a payment or have a problem and the customer quickly learns this ‘friend’ will reach out and bite them.

It is almost impossible to avoid doing business with the big guys. Loans, such as mortgages, are sold to major firms all the time. Homeowners find themselves sending a check every month to a big firm whether initially connecting with them or not.

Mega-banks and other large financial institutions are enormous bureaucracies, and communicating with any large bureaucracy can prove frustrating. Should the customer have a problem or question for their friendly financial partner, unending patience, perseverance, and endurance is required to work through a tortuous system of electronic answering equipment and low-level customer service representatives reading from a script.

So what does all this have to do with investing?

When Lehman Brothers went bankrupt and the financial crisis rippled through the financial world, the belief that certain companies were safe investments went out the window. Yet it is still true that large companies with real products and a track record are less risky than small and mid-cap corporations, especially young ones. Smaller companies offer growth potential, but also increased volatility and the possibility the company may not survive long-term.

Financial institutions are influential and make money – lots of money. Shareholders can benefit from this wealth.

So the question is: Which one(s) can be trusted with our investment dollars?

Reducing a large number of financial firms to a small list of investment possibilities is a time consuming, mind numbing, and awesome exercise in evaluating endless financial data. I decided to initially narrow my list using non-numerical criteria. Data analysis could wait for the short list.

I eliminated companies with poor customer service reputations, low employee ratings or a recent history of financial shenanigans. My rationale was that well-managed, well-run companies with satisfied employees would be better performing ones than those with unhappy customers and disgruntled employees.

I scoured lists assembled by various magazines and data research groups, such as Forbes Top Rated Financial Service Companies, Fortune Magazine’s Best Companies to Work For, Worst Companies to Work For, and MSN Money’s Customer Service Hall of Fame and Customer Service Hall of Shame.

The results of my unscientific review indicated the cream of the questionable financial field was American Express (NYSE: AXP).

The Customer Service Hall of Shame was a list of familiar names, led by Capital One. The company had the dubious distinction of receiving more complaints than any other credit card company. Other financial firms on the list included Citigroup, JP Morgan Chase, Wells Fargo, and Bank of America. Bank of America is currently downsizing and reprioritizing businesses. They may be too big to fail, but they are also too big to manage effectively. I will wait and see what the company looks like after all the changes occur.

American Express’ main business is credit cards. Major competitors are Capital One, Discover (NYSE: DFS), MasterCard (NYSE: MA), and Visa (NYSE: V).

I immediately eliminated Capital One because of their Number One rating on the Customer Hall of Shame. And I do not like their commercials.

My Financial Short List

That leaves Discover, MasterCard, and Visa. None appeared prominently on either commendable or shameful lists.

I had my first short list of financials. Now for some data comparisons:

Note: ttm = trailing twelve months

All four are corporate giants. American Express deserves accolades for most employees. I realize they are not all working in the U.S., but still, the American economy thanks you…

My main conclusion after looking at the numbers is that the credit card business is a lucrative one. I guess that is why so many businesses, from the airlines to your college alma mater, want a piece of the pie. All four companies have comfortable cash resources, impressive profit margins, and promising growth rates.

My second conclusion is that there is no clear winner or loser.

The reader can decide which company to buy, if any. Reviewing the numbers I would say Discover looks like the best value today. If you are looking for dividends, however, MasterCard should be considered. American Express, with the lowest P/E and the longest track record, is a conservative choice.

In the spirit of full disclosure I must admit I am very suspicious, cautious and skeptical of all big financials. If you do not like any of these companies, I understand.

The popular saying, “if you can’t beat them, join them” comes to mind. Credit card and other financial service companies play an essential role in our country’s – and the world’s – economic life. They are here to stay. As investors we may as well take advantage of their ability to amass monetary resources to help build our own personal wealth. 

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