Banks: Who is the Prettiest of Them all?

Rattnaa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Banking is one sector that cannot be ignored in the financial market. Yes, as in any sector banks also face the heat (trickle-down effect) of a bad economy as a whole and do go through ups and downs, but a good banking and financial industry was, is and will remain the backbone of any economy. There seem to be many banks in the U.S. which are big, and here in a series of articles we dissect a few popular stocks to see which one  fares better of the lot both as a company as well as from the stock-holders’ points of view.

As a comparison, along with two giants, in each one of the articles in this series we shall also analyze a small bank which may not be heavily traded on the exchanges, but which may otherwise have very strong fundamentals and may teach us about unique strengths and strategies which makes them a ‘good-performer’.

In this article we will look at Bank of America Corporation (NYSE: BAC),  Wells Fargo & Company (NYSE: WFC) and  Rurban Financial Corp.  (NASDAQ: SBFG).


Bank of America Corporation:-

A provider of various banking and financial products and services to a plethora of customers ranging from individual consumers, small-and middle-market businesses, institutional investors, corporations, and governments in the U.S.A. and internationally, Bank of America works through its subsidiaries. It provides a range of banking and nonbanking financial services and products through five business segments (earlier six): Consumer and Business Banking (CBB), Consumer Real Estate Services (CRES), Global Banking, Global Markets, and Global Wealth & Investment Management (GWIM) with the remaining operations under All Other segment. BAC, headquartered in Charlotte, North Carolina, operates in 50 states, the District of Columbia and more than 40 countries and has approximately 5,594 retail banking centers, about 16,220 automated teller machines (ATMs), online and mobile banking platforms in addition to nationwide call centres.

The company’s efforts to streamline its balance sheet are certainly bearing fruit as can be judged by its clearance of the last stress test in March, 2012. A slew of steps had been, are, and will be taken by the bank to stay afloat and gain strength fundamentally. Some of high and low points are:

 a)  Starting 2011, company-wide expense reduction initiative with planned savings to the tune of $8 Billion before the end of 2015. Perhaps it is going to be an ongoing strategy.

 b)  Strengthening of the Balance Sheet – as can be seen from the improving capital ratios and passing of stress tests this year.

 c)  Better recent margins, improving asset quality and becoming more focused on core activities by divesting in around 20 non-core assets.

 d)  Near term financial results will get affected by different possible head-winds on the revenue side (weak interest rates, etc.), ever-evolving regulatory-change impact, and elevated operating expenses (despite the cost reduction drive and majorly due to its mandatory addressing of legacy issues and continued investments in its franchise). Not a big issue to worry about, though.

 e)  BAC is slow in fulfilling its part with respect to underwriting of loans as per the ‘great-settlement’ with the U.S Government.

BAC, as a company, seems to be steering towards the right path (though speed-bumps are always there) and the management of the company are relentless in  trying to set things right fundamentally.


Wells Fargo & Company:-

Wells Fargo & Company, which was founded in 1929 and is headquartered in San Francisco, California, is a provider of retail, commercial, and corporate banking services primarily in the United States market. The operating segments have an expansive span from Community Banking, Wholesale Banking and Wealth, Brokerage, to Retirement. Distribution of banking services span across 9,000 banking stores in 39 States and the District of Columbia. The core areas of business of WFC are wholesale banking, mortgage banking, consumer finance, equipment leasing, agricultural finance and commercial finance.

This long distance running Arabian-Horse amongst the financial companies is a ‘consistent performer’. Let us look at the limbs and organs portraying company’s current performance:

a)  It has overcome the financial crisis well, and as of the 2nd quarter of 2012, has achieved growth in earnings per share for ten consecutive quarters and an impressive double-digit growth for a consecutive 5th quarter.

b)  Fargo has an excellent return on tangible-equity and the performance of its book of business has been outstanding which in turn nullifies its need for a best-in-breed Tier I common ratio to operate effectively (even though its capital strength may be less than others).

c)  Mainly flowing on mortgage-income and cross-selling being its strong area, Wells Fargo reported a profit boost in the second quarter (up 17%) in spite of a fall in revenue.

d)  Emerging strong and eyeing European bank assets to boost its business, WFC has capitalized intelligently on the deleveraging activities of the European banks. From the North American energy lending business of BNP Paribas SA,  WestLB’s $6 billion subscription finance portfolio to the loan portfolio purchases from Bank of Ireland and Allied Irish Banks, this bank has and will be benefiting from the turmoil in the financial market with a multitude of business acquisitions and purchases of loan-books.

e)  Wells Fargo has a concrete potential for profitability, which arms the company with the basis to efficiently manage the mortgage repurchase concern and sail smoothly through the current strained operating atmosphere.

WFC is a reliable company having a reasonable valuation which seems very much fundamentally-strong. Its management is taking intelligent and timely decisions therefore resulting  in an ever increasing earnings-estimate and a good track record of dividend-paying.


Rurban  Financial  Corp:-

A financial services holding company based out of Defiance, Ohio, Rurban Financial Corp. was founded in 1983 and caters to consumers and small businesses alike. Its areas of services include wealth management, mortgage banking, commercial and agricultural lending, data and item processing, and trust and financial services. Operates through 2 subsidiaries, a) The State Bank and Trust Company (State Bank) and b) RDSI Banking Systems (RDSI).

State Bank’s limbs criss-cross and crawl to 18 banking centers in seven Northwestern-Ohio counties and one center in Fort Wayne, Indiana, besides two loan production offices in Columbus, Ohio and one loan production office in Angola, Indiana.

On the other hand, RDSI provides item processing services to community banks located in the Midwest.

The second quarter results, recently out, promise a lot as far as this company is concerned. This past year two product lines a) commercial real estate loans to hold in portfolio, and b) residential mortgages that the company itself originates for sale but continues to service, accounted for much of its six percent core revenue growth.  A strong positive signal and proof of faith in its bright-future by its banking clients is established by the fact that they have begun to extend the renewal contracts for years rather than months, and some have even expanded their relationships

Further, regular replenishment of its loan-pipeline as well as its tremendous winning-performance made the company grow nearly $12 million of commercial and commercial real estate loans past quarter, even while bracing the tough underwriting standards (resulting in maintenance of  asset quality near the top of the industry-standard) and during existence of the challenging fact that it has been working in not-so-high-growth markets !!

Growth is there, as their banking clients have started to sniff and comb newer business-opportunities and have also started to expand, and to cater to which the new loan production office in Columbus, Ohio was established by RBNF recently.

A well-energized and well-positioned company, having this highly-rated risk-adjusted stock, is ’roaring’ to capitalize on its improved efficiencies and commitment to growth !! A good buy and hold stock medium to long term.

rattnaakolkata has no positions in the stocks mentioned above. The Motley Fool owns shares of Bank of America and Wells Fargo & Company and has the following options: short OCT 2012 $33.00 puts on Wells Fargo & Company and short OCT 2012 $36.00 calls on Wells Fargo & Company. Motley Fool newsletter services recommend Wells Fargo & Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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