Under-the-Radar "Banks" Hiding in the Dow Industrials

As of March 31, 2014, the FDIC reports that there were 6,730 banks in the U.S. Of those, only 107 have total assets greater than $10 billion. Three of the biggest banks are components of the Dow Jones Industrial Average (DJINDICES: ^DJI  ) .

Banks are naturally associated with debt. We take out loans to pay for homes or cars or even our educations. The banking business is, in most ways, the business of debt. But that doesn't mean banks are the only entities that run debt-centric operations. In fact, some non-bank companies have massive debt portfolios.

GE Capital -- The one you've probably already heard of

General Electric (NYSE: GE  ) is by nature a conglomerate, and within that conglomerate the company has a finance division, GE Capital. This division makes loans to individuals, businesses, and everything in between. It finances homes, cars, working capital, and even airplanes.

GE Capital alone produced $10.5 billion in revenue for the quarter ending March 31. That translated into almost $2 billion in net income. The division has total assets of -- wait for it -- $510 billion. Believe it or not, GE Capital is the eighth-largest bank holding company in the U.S.

But GE Capital is a little too obvious. Let's move on to some other examples that don't immediately come to mind.

The $8 billion finance company headquartered in San Jose
Would you believe it if I told you that Cisco Systems (NASDAQ: CSCO  ) has an $8 billion portfolio of loans and leases? Would you be even more shocked if I told you that at this size, this "bank" would be the 125th-largest in the U.S.?

Well, it's all true. Cisco has about $8.2 billion in credit receivables, which would land it between First Citizens Bank and Trust of Columbia, S.C., and First Midwest Bank of Itasca, Ill.

The trick here is, of course, that many manufacturers offer their own financing to help customers purchase their high-end wares. Cisco is one of many large companies with large books of credit.

Cisco offers leases and loans to assist customers with purchasing its networking hardware and other offerings. Generally, the company offers four-year terms for leases and three-year terms for loans. Cisco secures the credit with collateral; just like your mortgage uses your home as collateral, Cisco uses  the equipment it's financing to secure the loan or lease to the customer.

And the list goes on
Catepillar
(NYSE: CAT  ) is a great example within the Dow Jones Industrials. Beginning on page 10 of the company's most recent quarterly filing with the SEC, management spends eight full pages discussing the business's $21 billion loan and lease portfolio. The discussion includes banking jargon like "troubled debt restructures," "non accrual loans," and an "allowance for credit losses." If you stop paying attention for just a moment, you may mistake that particular 10-Q as an actual bank's filing!

How much do these financing segments matter?
For a company like General Electric, the well-being of it's finance division matters a whole lot. GE Capital is simply so massive that both the profits and the risks that stem from it have a major impact on the profitability and health of GE as a whole.

For other companies, like Cisco or Caterpillar, the impact is much less significant. Cisco has total assets of over $100 billion and a market cap in excess of $132 billion. Relative to the total enterprise, Cisco's finance portfolio is somewhat marginal.

Caterpillar stands somewhere in the middle. The company has about $85 billion in total assets, and as a percentage of total assets, the financing portfolio is surprisingly large at about 20%. That said, the significance of that portfolio is nowhere near the importance of GE Capital to GE.

The Foolish takeaway
The deeper you dive into a potential investment, the more you'll learn about the business that you may not have otherwise known. Sometimes these discoveries are simply curious -- and sometimes they make the difference between a buy and a sell.

These customer finance units are common, and in general they exist far on the periphery of the business -- Cisco's market cap is about 16 times larger than its full book of loans and leases. And yet, when you read about this little bank-like creature hidden within Cisco, it still sounds a whole lot like simple, old-fashioned banking, even for a high-tech networking company. Its further proof that the deeper you go, the simpler it gets -- all the more reason to do your homework.

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