3/14/2013 4:15 PM ET|
Buy the next Bank of America
Before it was too big to fail, Bank of America was built on bringing financial services to the little guy. These days, smart regional banks fill that role and look like good buys.
After the San Francisco earthquake devastated the city in 1906, Amadeo Pietro Giannini, president of the Bank of Italy, set up a portable office -- a plank over two barrels. He took in cash and lent money out for reconstruction, usually with just a handshake. Every loan he made was paid off.
In 1928, just before the stock market crash, Giannini merged his bank -- which he'd founded in San Francisco in 1904 -- with another in Los Angeles and took over that bank's name: Bank of America. Because the name represented his ideals. He wanted to build a bank that did business across the country with savers and investors big and small.
Today Bank of America is international, operating in 50 states and more than 40 countries, with customers in more than 150 countries. It has $2.2 trillion in assets and holds 12% of all the bank deposits in the United States. It is the fourth-largest U.S. mortgage lender.
But Giannini might not recognize it. He surely would be appalled by some of the decisions of the past few years. The disastrous takeover of Countrywide Financial. The acquisition of Merrill Lynch that required $45 billion of government help -- and $118 billion in loan guarantees -- to keep the enterprise from foundering.
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The bank scores low on customer service in surveys, including a No. 1 ranking in MSN Money's "Customer Service Hall of Shame." And its stock, which traded above $50 before the banking crisis, is mired near $12 a share.
Which raises the question: Is there a next Bank of America, where you can bank or invest without any qualms? The answer is yes, at least for investors; among the best alternatives are BB&T (BBT), U.S. Bancorp (USB) and PNC Financial Services (PNC). Here's why.
A model ruined
The alternatives don't exactly fit the model Giannini envisioned, but they're much closer than what B of A has become.
That model is basic commercial banking, practiced every day by more than 6,000 banks across the country. They take in deposits. They pay interest on savings and certificates of deposit -- admittedly not much right now. They loan money to businesses to snap up new inventory, purchase lots to build houses on and to buy new plants and equipment. The loans allow farmers and local businesspeople to finance their operations. The banks manage risk, and, if all goes well, they grow, preferably adding branches that allow their organizations to diversify their risks and build capital.
A.P. Giannini's little bank also did something banks didn't always do: serve the little guy as well as the wealthy. His bank took in deposits from immigrant merchants, tradesmen and peddlers, paying interest on their savings and lending them money.
And Giannini, a former produce wholesaler and the American-born son of Italian immigrants, had one other important idea, says Richard Sylla, the Henry Kaufman professor of the history of financial institutions and markets at New York University. Giannini used California's liberal law on branch banking to bring the bank to his customers. The Giannini model runs through American banking today.
Bank of America was a key player in the development of California's economy. The bank helped build the Golden State's wine industry. It was a player in financing movies. It bought the bonds that built the Golden Gate Bridge. When Walt Disney went more than $2 million over budget making "Snow White and the Seven Dwarfs," Bank of America lent him the money to finish what would become a classic. The bank was an early lender to Hewlett-Packard (HPQ), the classic Silicon Valley startup.
Giannini also started Transamerica, which owned banks across the West, and Giannini would have been delighted to expand across the country. But local bankers resisted changing state laws, particularly in the South and East.
The Bank Holding Company Act of 1956 required Transamerica and Bank of America to go their separate ways. Transamerica's banks were spun off into what became First Interstate Bancorp, now part of Wells Fargo (WFC).
But even the original Bank of America wasn't immune to problems created by too much growth. It sustained big losses in the 1980s, when Latin American loans went bad. It suffered additional problems with real estate loans, securities transactions and the like. That gave NationsBank, the Charlotte, N.C., bank that was gobbling up banks in the South and Northeast, an opening to buy Giannini's bank. NationsBank took over the Bank of America name, just as Giannini had done.
Along the way, it had become anything but a little bank for the little guy.
And then the crash
The new owners continued to buy banks and other institutions aggressively until the 2008 housing crash. Bank of America's Merrill Lynch deal, done as Lehman Brothers was failing, was itself deeply problematic because Merrill Lynch had made a huge bet on becoming a key dealer in securities backed by subprime mortgages -- mortgages made to borrowers with little or no credit histories.
The $4-billion Countrywide purchase was by far the "stupidest" of the deals, says analyst Richard Bove of Rafferty Capital. (NYU's Sylla agrees.) Litigation from fraudulent foreclosures, horrifically bad paperwork and fines have totaled more than $40 billion, not to mention the losses the bank company absorbed as all the subprime loans in Countrywide's portfolio went south.
And so did Bank of America's stock price -- falling 95% from a peak of $54.90 in November 2006.
There's an important lesson about banking based, at the very least, on Bank of America's history of the past few years. The huge financial organizations that grew up under deregulation have proved to be extremely difficult to understand and even harder to manage. Citigroup (C) nearly collapsed in 2008, hobbled by many of the same problems that bedeviled Bank of America. In 2012, JPMorgan Chase (JPM) suffered a deeply embarrassing trading loss. UBS (UBS), the Swiss bank, has been forced to retrench.
The little-guy banks
Which brings us back to Giannini's notion that banking for the little guy, expanding as branch after branch reaches community after community, is a good business. And it is, when practiced skillfully.
BB&T, the North Carolina regional banking company, is one that does it well, says Bove. He also is a fan of U.S. Bancorp and PNC Financial for the same reason. They don't have investment banking arms. They watch risks carefully. They maintain high levels of capital. Profits may not be as glamorous as on Wall Street, but the risks aren't as high, either. They're solid. Returns on assets are 1.5% or higher. Returns on equity are above 10%.
And as investments, banks generally are in pretty good shape again. You may hate them, Bove notes, but their overall profitability in 2012 was the second best on record, and 2013 is likely to be the best.
One reason they may produce outsized profits comes straight out of the past. Banks can't own and develop real estate. But they have acquired a ton of it -- especially residential property -- because of foreclosures. It's carried on the books at low, low values. And when they sell it, the transactions will produce big profits.
As a result, he thinks even formerly troubled smaller banks such as SunTrust (STI), Regions Financial (RF), KeyCorp (KEY) and Fifth Third (FITB) are worth considering. Even if they've had gains of 71% or more since lows reached the during the August 2011 debt-ceiling crisis.
But don't forget B of A
Of course, it's also worth noting that Bove is also bullish on B of A, because of the real estate play. And investors have agreed. The stock is up 300% from its March 2009 intraday low of $3 and nearly 85% from the August 2011 low.
Its real estate lending business is still problematic, losing $6.5 billion in 2012, down from $19.5 billion in 2011. Otherwise, the company is at the very least stable. Merrill Lynch has proved to be a great deal. Profit in its global wealth management business, which is basically Merrill Lynch, jumped 29% in 2012, to $2.2 billion.
While Bove is a bull on Bank of America and banks generally, he offers one important piece of advice. He thinks the group is headed higher; he sees Bank of America shares hitting $30. But it will take three years to get there.
NYU's Sylla that the model Giannini pioneered can be seen in Canada's banks: branches from Newfoundland to British Columbia and steady, conservative lending. They're safe and solid, if perhaps a little boring.
But many bankers have found they can make good livings as commercial bankers and deliver for shareholders, he said. Don't be surprised if some of the largest banks find it makes more sense to shed some of their more exotic and troublesome businesses and start to look like they used to.
Meanwhile, for investors and perhaps anyone unhappy with giant B of A, BB&T, U.S. Bancorp and PNC Financial are worth a look.
At the time of publication, Charley Blaine did not own or control shares of any company mentioned in this column.
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If you can..work yourself away from the to big to fail banks.
Use your nearest small town banks or credit unions.
Bank of America is no longer an American Bank. It is a Global Bank like Barclays, HSBC, Bank of England, Bank of China, etc. It has customers in 150 countries covering half of the world population. Yet, US Tax Payers keep bailing them out keep it a float from foundering.
BOA has written off bad debts from their books, collected or deducted it from their taxes, and sold off the accounts pennies to dollars collection agencies. These collection agencies are using the state law to harass and collect the money once owed to BOA, this has become a lucrative business. State Attorney's general and legislature is finally looking into it. Same tax payers of america who bail these banks out getting screwed from the other end!
Has anyone considered HOW either large or small banks will function in the coming collapse? We cannot sustain Bernanke's false Wall Street Boon Economy much longer. Literally everything is at the brink of collapse and structured to liquidate to premium shareholders, derivatives (held by premium shareholders) and default the imported trash in the backrooms and warehouses to the streets where it will cause cascade failure. The debt contracts come before the public. The way I see it, anything to do with banks-- period-- is a risk the average American cannot afford.
The farce the banks like to pass on to us is that with the bank bailout they quickly paid all the money back with interest. After the great meltdown the fed made unlimited nearly free money available to banks and they took advantage of it. The feds effort to save the banks meant they loaned or guaranteed almost 13 trillion dollars which they could then lend out at high interest rates. They in effect paid us back with our own money and quickly resumed paying CEO's 50 million dollar bonuses. How could people believe that with merely a short term loan they could so quickly repay them despite continuing 20% default rates?
"According to a team at Bloomberg News, at one point last year the U.S. had lent, spent or guaranteed as much as $12.8 trillion to rescue the economy. The Bloomberg reporters have been following that money. Alison Stewart spoke with one, Bob Ivry, to talk about the true cost to the taxpayer of the Wall Street bailout."
The current CEO of B of A is Brian Moynihan who has been DESPARATELY treading water trying to stop the losses from B of A’s loan servicing division, Legacy Asset Servicing. If you are one of Legacy’s customers, you know the extreme frustration of trying to get a mortgage modification or forbearance if you are struggling at all. If you are lucky enough to get a mod, you may have to repay every penny of the missed payments, penalties, pay the late interest and pay their outrageous attorney fees which WILL BE ADDED to the balance of the loan. So let’s say your payments gets lowered by $1,000 per month. If the new balance cannot be amortized over 40 years (to keep your new payment low) B of A will ADD a BALLOON payment on so Legacy Asset Servicing won’t have to suffer any more losses than they have already suffered! The kicker is even if they “write down” $50,000 or more in an effort to actually HELP a homeowner, they still rake in BILLIONS of dollars every month in interest. B of A is too big to collapse but you can stop taking out loans, stop using their credit cards (30% interest) and stop depositing money in that institution to make a point. It’s ironic that Moynihan claims to respect B of A’s customers but if you check how they actually treat their customers, you will see they are all about PROFIT. That’s ok but don’t pee down my back then try to convince me it’s raining…
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