The 2 Safest Bank Stocks for Your Portfolio

If you're look for the safest bank stocks to add to your portfolio, sometimes it's helpful to think outside the box.

Sep 3, 2014 at 9:45AM


As a general rule, banks aren't safe investments. They're highly leveraged, exposed to a variety of risks, and often run by executives who lack the temperament to steer a lender through multiple credit cycles.

But does this mean you shouldn't invest in them? Absolutely not, as there are few business types with the innate ability to compound returns at a higher rate.

What it does mean, however, is that you should be selective when it comes to choosing bank stocks to add to your portfolio. And, more specifically, I'd encourage you to put a premium on safety.

Identifying safe bank stocks
The essence of a safe bank stock boils down to how effectively it manages credit risk -- that is, the risk of loss stemming from the failure of borrowers to repay loans.

"When you think about what, in fact, distinguishes a bank as a lender," New York Community Bancorp CEO Joseph Ficalora explains, "it's how much money it loses on the asset that it chooses to take risk with."

The objective is thus to identify banks that have figured out how to mitigate credit risk either through an innovative business model or a demonstrated history of prudent risk management.

Two banks that come to mind are The Bank of New York Mellon (NYSE:BK) and State Street (NYSE:STT). Although these are two of the oldest companies in the United States -- the former traces its roots back to Alexander Hamilton, the nation's first Treasury Secretary -- their business models are far from traditional.

Most banks make most of their money by arbitraging interest rates -- click here to learn more about how the typical bank operates. They borrow money from depositors at low short-term rates and then lend it out at higher long-term rates.

By contrast, The Bank of New York Mellon and State Street earn the lion's share of revenue from noninterest sources -- namely, by overseeing massive portfolios of assets under custody, administration, or management.

While State Street's balance sheet boasts consolidated assets of $282 billion, it gets paid to administer a $31 trillion portfolio of its customers' assets. And while The Bank of New York Mellon has $401 billion in balance sheet assets, it oversees $30 trillion in customer-owned assets.

As a result, because the vast majority of profit-generating assets at these two banks aren't in fact owned by them, neither The Bank of New York Mellon nor State Street faces the risk that they will default. In other words, they've mitigated credit risk while retaining the right to earn noninterest income from trillions of dollars' worth of assets.

The Foolish bottom line
One of my favorite quotes about banking is attributed to Carl Webb, the second in command at Diamond A Ford, a bank buyout firm founded by Texas billionaire Gerald J. Ford. "Banks get in trouble for one reason," says Webb. "They make bad loans."

The point here is simple: If you're looking for safe bank stocks, a great place to start is with institutions like The Bank of New York Mellon or State Street that aren't driven to make bad loans by the desire to grow revenue.

Bank of America + Apple? This device makes it possible.
recently recruited a secret-development "dream team" to guarantee that its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming that it's destined to change everything from banking to health care. In fact, ABI Research predicts that 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here

John Maxfield has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Apple and Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

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