Share prices of the six largest banks in the country are underwater so far this year. Investors can thank subprime mortgage market woes for Wall Street's concerns about financial stocks in general. But the bigger banks are proving that diversified business models can withstand the heat.
In Wachovia's
During the earnings conference call, management spent extra time emphasizing its "superior credit quality" and ability to keep nonperforming assets far from historical peaks due to pretty low exposure to subprime mortgages, even with the Golden West acquisition and consumer moves to less profitable but more stable fixed-rate mortgages. Overall, the key banking metrics of net interest margin (3.01%) and return on equity (13.47%) fell from last year's first quarter but still came in strong, as did deposit growth (up 5%).
Looking at the bigger picture, Wachovia is an immense bank exposed to a wide array of product categories. General banking services account for more than half of revenues, but investment banking, wealth management, and brokerage services make up the rest. In terms of geography, the Southeastern region of the U.S. makes up more than half of sales, but Wachovia operates in just about every state.
In other words, unless the entire domestic economy tanks, Wachovia should do just fine, as should money-center banking peers. Here's an overview of where the top six banks trade, based on earnings expectations for fiscal 2007.
Forward P/E |
Dividend Yield |
|
---|---|---|
Bank of America |
10.2 |
4.5% |
Citigroup |
11.5 |
4.2% |
JPMorgan Chase |
11.9 |
2.8% |
Wells Fargo |
12.6 |
3.3% |
U.S. Bancorp |
12.4 |
4.6% |
Wachovia |
10.8 |
4.2% |
As you can see, Wachovia and archrival Bank of America
Wachovia could be an appealing big-bank investment alternative because of its exposure to faster-growing Sun Belt states. Plus, it recently touted its ability to offer traditional banking services to the newly acquired Golden West branches. Finally, it should be able to wring further cost savings from recent acquisitions.
The big banks tend to trade as a group and have similar valuations. Therefore, your best bet may be to purchase a basket of the stocks. Bill Miller, legendary investor and chief of the Legg Mason Value Trust, refers to this as getting paid to diversify, and this just happens to be the current strategy of Motley Fool's Income Investor when it comes to banking stocks; Bank of America, JPMorgan Chase
For related Foolishness:
- Before the Call: Waiting for Wachovia
- Is It Time to Buy Subprime?
- Calculating Return on Assets
- A Closer Look At Bank Stocks
Want to get paid to invest? Analyst James Early and other investors like you can show you how with a free trial to Income Investor.
Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. The Fool has an ironclad disclosure policy. Feel free to email him with feedback or to discuss any companies mentioned further.