Some financial stocks thrive amid credit crisis

It has been a terrible six months for financial stocks _ or at least most of them.

A handful of companies, including Charles Schwab Corp., Discover Financial Services and MasterCard Inc. have thrived in spite of the credit crisis, or in some cases because of it.

Last summer, as bad bets in the mortgage market were revealed, investors began reassessing their appetite for risk leading to the sell-off of a variety of investments, sending shares of most financial companies lower.

Hudson City Bancorp is another company that has weathered the crisis well. The third-biggest thrift in the U.S. this week reported profit growth of 25 percent in the first quarter. The Paramus, N.J.-based bank, which runs about 120 branches in the New York metropolitan area, sidestepped the credit crisis plaguing many other banks by adhering to strict lending standards.

The bank requires its mortgage loans be secured by more collateral than most other banks, and never issued "subprime" loans, or loans to people with bad credit.

"You have to have a plan that works in all interest rate and credit cycles," Hudson City's chief executive, Ronald E. Hermance Jr., said in an interview. "Although it's been tough times for an awful lot of folks, it's going to be our best year ever."

Hudson City is writing off just 0.01 percent of its $24 billion loan portfolio annually. By comparison, Bank of America Corp. is writing off 1.25 percent of its portfolio and Washington Mutual Inc. is writing off 2.24 percent.

With other banks and lenders shrinking or going out of business, Hudson City is enjoying a less competitive mortgage market. Applications for mortgages jumped 78 percent in the first quarter, compared with the same period last year.

And while investors have pounded shares of many other financial institutions, Hudson City's have climbed 26 percent in the last six months. The KBW Regional Banking Index has tumbled about 11 percent in the same period.

Bond insurer Assured Guaranty Ltd. is also flourishing as its competitors suffer. Assured Guaranty's rivals are all but handcuffed because of concern they will be unable to pay claims. The two biggest bond insurers, MBIA Inc. and Ambac Financial Group Inc., lost a combined $5.13 billion last year.

Many bond insurers have been crippled by a foray into guaranteeing so-called "structured" deals, or investments splicing payments from a number of sources including risky mortgage debt. Assured Guaranty didn't expand as deeply into structured finance as most of its competitors. Its stock is up more than 10 percent in the last six months, while Ambac's shares are down about 91 percent in the last six months and MBIA's have sunk 79 percent.

Credit card companies Discover and MasterCard are also holding up well amid the credit crisis.

Discover's conservative approach to credit risk has insulated it somewhat. Its shares are up 21 percent in 2008. Shares of Mastercard, which provides a network for lenders to issue loans to consumers and charges fees, have risen 11 percent so far this year.

And Charles Schwab is down so far in 2008, but has risen 11 percent in the last year as clients used the brokerage to shuttle money out of risky stocks and into safer investments, like money-market accounts.

Some of the lenders best-positioned to survive the credit debacle are the ones at the bottom of the credit ladder: pawnshop operators.

Pawnshop operators issue loans in exchange for collateral like a piece of jewelry. While pawn shops' customers are as likely as anyone else to default on loans, pawn shops have enjoyed an unexpected boon: gold, which skyrocketed this year, at one point to more than $1,030 an ounce. Because many clients pawn gold, pawn shops are reaping hefty profits when they sell the collateral.

Shares of pawn shop operator Cash America International Inc. are up 40 percent this year, while Ezcorp Inc. stock is up 30 percent.

George Feiger, chief executive of Contango Capital Advisors, which manages about $1.4 billion for clients, said no matter how well-managed financial companies are, few aren't vulnerable to credit cycles. He cautions against assuming companies that have fared well so far will continue to excel. Many capably managed companies were torpedoed in the crisis, and the same could happen to any company if another domino falls, he said.

"There is no pure play," Feiger said.