1 Reason M&T Bank, KeyCorp, and Comerica Could Outperform Going Forward

These three banks have some of the most valuable deposit franchises in the bank industry.

Apr 1, 2014 at 11:49AM

If you're looking for bank stocks that still have room to run, then I encourage you to add M&T Bank (NYSE:MTB), KeyCorp (NYSE:KEY), and Comerica (NYSE:CMA) to your watchlist. These three banks have uniquely valuable deposit franchises that will yield outsized profits once interest rates head higher.

It's important to remember that lenders make money doing one thing in particular: arbitraging interest rates. They borrow at low short-term rates, generally from depositors, and then lend those same funds out at higher long-term rates. The bigger the difference between the two, known as the "interest rate spread," the larger the profit.

It follows that there are two principal ways for a traditional lender to boost its bottom line. It can increase its yield on earning assets by investing in riskier loans and/or securities. This is the least attractive option, as it ratchets up the possibility that credit losses will eat into capital and weigh on returns.

Alternatively, a much safer approach is to decrease the cost of funds -- in other words, the interest rate it pays to borrow money. The most effective way to accomplish this is to accumulate a large portfolio of interest-free checking accounts, referred to in the industry as "demand deposits."


It's with this in mind that I encourage you to keep an eye on M&T Bank, KeyCorp, and Comerica. As you can see in the chart above, these banks rely on demand deposits for a greater percentage of funding than any other bank of comparable size.

Comerica leads the way with 40% of its funds consisting of demand deposits. Second is M&T Bank at 33%. And rounding out the top three is KeyCorp at 32%.

Now, just to be clear, there's more to running a safe and profitable bank than accumulating a large base of demand deposits. For instance, a good bank must also be adept at managing credit risk and thereby not underwriting bad loans or investing in questionable securities. On top of this, it's critical to keep operating costs low lest they consume a disproportionate share of revenue.

But these caveats aside, a large demand deposit franchise is one of the principal hallmarks of a great bank. And while it's impossible to say for sure whether any or all of these banks have what it takes to outperform going forward, their success on the deposit front certainly makes them worth watching.

Big banking's little $20.8 trillion secret
Do you hate your bank? If you're like most Americans, chances are good that you answered yes to that question. While that's not great news for consumers, it certainly creates opportunity for savvy investors. That's because there's a brand-new company that's revolutionizing banking, and is poised to kill the hated traditional brick-and-mortar banking model. And amazingly, despite its rapid growth, this company is still flying under the radar of Wall Street. To learn about about this company, click here to access our new special free report.

John Maxfield has no position in any stocks mentioned. The Motley Fool owns shares of KeyCorp. 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.

A Financial Plan on an Index Card

Keeping it simple.

Aug 7, 2015 at 11:26AM

Two years ago, University of Chicago professor Harold Pollack wrote his entire financial plan on an index card.

It blew up. People loved the idea. Financial advice is often intentionally complicated. Obscurity lets advisors charge higher fees. But the most important parts are painfully simple. Here's how Pollack put it:

The card came out of chat I had regarding what I view as the financial industry's basic dilemma: The best investment advice fits on an index card. A commenter asked for the actual index card. Although I was originally speaking in metaphor, I grabbed a pen and one of my daughter's note cards, scribbled this out in maybe three minutes, snapped a picture with my iPhone, and the rest was history.

More advisors and investors caught onto the idea and started writing their own financial plans on a single index card.

I love the exercise, because it makes you think about what's important and forces you to be succinct.

So, here's my index-card financial plan:


Everything else is details. 

Something big just happened

I don't know about you, but I always pay attention when one of the best growth investors in the world gives me a stock tip. Motley Fool co-founder David Gardner (whose growth-stock newsletter was rated #1 in the world by The Wall Street Journal)* and his brother, Motley Fool CEO Tom Gardner, just revealed two brand new stock recommendations moments ago. Together, they've tripled the stock market's return over 12+ years. And while timing isn't everything, the history of Tom and David's stock picks shows that it pays to get in early on their ideas.

Click here to be among the first people to hear about David and Tom's newest stock recommendations.

*"Look Who's on Top Now" appeared in The Wall Street Journal which references Hulbert's rankings of the best performing stock picking newsletters over a 5-year period from 2008-2013.

Compare Brokers