The banking crisis is by no means over. But I think we can start putting together a list of winners.
When we will want to buy stock in these banks is another question.
What characterizes the four winners that I’m going to name in this post?
First, they’ve come through the crisis so far in better shape than their peers. Their balance sheets are strong enough so that they can think about investing in future opportunities rather than about ways to survive.
Second, they have very attractive, already identified, opportunities ahead of them and they’ve already taken concrete steps to begin exploiting those opportunities.
I’ve got four winners in mind. I’m sure others will emerge as the world’s banks gradually work through still huge portfolios of problem loans. But right now these banks look like the best bets to exploit the crisis.
In alphabetical order they are Banco Santander (STD), Blackrock (BLK), Goldman Sachs (GS), and HSBC (HBC).
Banco Santander (STD)? Okay I admit that it seems odd that one of the banking winners should come out of Spain. After all the Spanish housing bubble was as bad as the one in the United States (if not worse.) But Spanish banking regulators moved earlier than regulators in the U.S. (where some would argue regulators didn’t move at all) to require banks to put more into reserves as economic growth speeded up. As a consequence rather than putting assets on the block, Santander has been buying them in this crisis. In 2008 the bank bought Alliance & Leicester and Bradford & Bingley, two failing United Kingdom mortgage lenders. Added to the company’s 2004 purchase of Abbey National, another mortgage lender, the purchases 13% of the United Kingdom’s mortgage market, 9% of personal loans, 12% of bank accounts, and 10% of retail deposits. It’s the last that’s most important in my opinion. In a post-crisis era when regulators are eager to move banks away from a dependence on raising capital to lend in the short-term money markets, Santander has built a machine for sucking up lower risk and more stable deposits from individuals. The bank now has $114 billion in retail savings deposits in the United Kingdom. In the first half of 2009 Santander has made one in every seven mortgages done in the country and profits at the company’s United Kingdom operations were up 30%. (The bank gets about one-third of its profits from Latin America and the rest from Europe.)
This isn’t to say that Santander navigated the financial bubble perfectly. The bank bought 25% of troubled U.S. bank Sovereign Bancorp near the peak of the market and has since purchased the remainder. Santander took a $1 billion write off on that purchase in 2007 and there’s no guarantee that’s the last of the damage.
Blackrock (BLK) bought Merrill Lynch Investment Managers in 2006 turning the fixed income specialist into one of the world’s to asset management companies with $1.3 trillion under management by the end of 2008. But a deal that the financial crisis created will vault Blackrock from one of the world’s top asset managers to #1. In a deal expected to close this month Blackrock will Barclays Global Investors from Barclays (BCS), expected to close this month, will vault Blackrock from one of the world’s to asset managers to#1 with $3 trillion in assets under management.
There are advantages to the deal besides just size. The deal makes Blackrock a better balanced company with fixed income and cash management falling to 50% of assets under management (from 60%) and equity and hybrid assets climbing to 45% (from 20%). The company also has a big new opportunity in the retail market since as part of the Barclays deal Blackrock got the iShares ETF portfolio. With about $340 billion in assists, this portfolio of exchange traded funds makes up about 50% of the U.S. market for that product.
Goldman Sachs (GS) is on a hiring spree. That should tell you pretty much all you need to know about how bright this bank thinks its future is. Goldman is aiming at 200 new hired for its global asset management business, one of the few banking segments where Goldman is, surprisingly, an also ran. In 2007, the bank ranked just 17th in the world in terms of assets under management. In the second quarter net revenues from asset management were $922 million or only 6.5% of total bank revenues.
Despite the clear advantages to be gained from running the U.S. Treasury during the financial panic—Bush administration Treasury Secretary Henry Paulson was a former Goldman CEO—Goldman hasn’t come out of the crisis unscathed. The company has had to convert to bank-holding company status. That means more regulation and less leverage. At the end of 2007 Goldman Sachs lent out 25 times the amount of its equity capital. Regulators—yes, even U.S. regulators with their resumes that often include a stint at Goldman– won’t lent a bank holding company run risks of that size. Last September Bank of America (BAC) showed leverage of 11 and JP Morgan Chase (JPM) was at 13 times. The change will have the biggest impact in Goldman’s trading business where using less leverage will make it harder to make big money on relatively small changes in prices. Trading has been Goldman’s biggest source of revenue.
HSBC (HBC) has puts its CEO where its mouth is. After getting its clock cleaned in the U.S. market after it bought mortgage lender Household International in 2003—just to time to run up huge losses in the housing bubble—the bank has said it’s going back to its roots in Asia where it was founded in 1865. On September 25, the bank announced that CEO Michael Geoghegan would be moving his office from London to Hong Kong. The move is more than symbolic. In the first half of 2009 China and Hong Kong accounted for 40% of the bank’s profits and Asia is where future growth will come from.
In addition the bank is negotiating to become the first Western Bank to list on the Shanghai stock exchange. That would give HSBC a huge boost in name recognition with Chinese savers and investors and push the bank further into China’s huge savings market.
Not that HSBC is doing badly in scooping u deposits even without that listing. HSBC is the world largest gatherer of deposits with $1.1 trillion from 125 million retail customers. The bank has moved to buttress that steady source of capital with an April rights offering that brought in $17.7 billion from equity investors.
The bank wouldn’t have needed to raise so much capital without the Household International debacle. HSBC bought the mortgage and personal finance company in 2003 for $14.8 billion. In the financial crisis write offs quickly exceeded the purchase price with the company taking a $17.2 billion write off in 2008 for losses in 2007.
That’s my list of winners to date. When would I buy any of them? Not for a while yet. As I wrote earlier today reports from the European Union and the International Monetary Fund about potential bank losses are likely to make the sector highly volatile over the next week. At the G20 conference in Pittsburgh, regulators have agreed to implement tougher reserve requirements in 2010 and 2011. If you buy right now, you’re paying for too much for near-term optimism and taking on too much intermediate-term risk. I’d wait.
But if you must buy—and I know some readers as less negative on this sector and the market as a whole than I am—I’d go with HSBC. I think the possibility of a Shanghai listing gives the stock a short-term catalyst that the others lack.