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A Guide to the Financial Services Sector

Nicole Seghetti
September 25, 2012

Worldwide Invest Better Day 9/25/2012

This month at The Motley Fool, we're committing ourselves to getting back to basics, culminating on September 25 with Worldwide Invest Better Day. So far, my Foolish colleagues have armed you with information like the worst investment advice we've received and our favorite investing books. In a previous article, we reviewed stock diversification, a key fundamental of investing. We're looking at stock sectors one by one, focusing today on financial services.

Overview of the financial services sector
Sensitive to the health of the economy and changes in interest rates, the sector includes companies in banking, consumer finance, capital markets, and insurance. The financial services industry grew quickly in the early 2000s because of rising home values, loose lending standards, the invention of new products, and the increased use of debt.

By 2008, the environment started to change, and falling asset values and rising loan losses led to a worldwide credit crunch, meaning a sudden reduction in the availability of loans and an increase in the cost to obtain loans. The sector is currently experiencing the impacts of the credit crunch, among them increased financial reform and regulation, a reduced use of debt, and lower profitability for the industry.

So how will these changes impact financial services companies?

Industry dynamics, major players
Megabank Bank of America (NYSE: BAC  ) has been cutting jobs, all part of CEO Brian Moynihan's strategy to shrink the lender in an effort to boost profitability. It'll have shed close to 16,000 by year's end. B of A's botched-up $5 monthly debit-card fee was nearly the nail on the coffin, but the company is banking instead on the after-effects its job shedding and QE3 to prove a windfall for the bank's bottom line. Bank of America's stock is up 58% year-to-date despite revenues being down over 50% since 2009.

Meanwhile, the fallout hasn't been as systemic for regional banks like US Bancorp (NYSE: USB  ) and BB&T (NYSE: BBT  ) . It's what these banks aren't that makes them attractive for investors: They don't have comparable investment banking reach and didn't participate in aggressive lending to the same degree as their "too big to fail" colleagues. Therefore, these banks have relatively strong capital positions and less underlying risk. Mosey on over to this primer on bank stocks if you'd like to learn more.

Industry trends including enthusiasm for new products like exchange-traded funds (ETFs) should help drive revenues for companies with exposure to capital markets. With $3.5 trillion in assets under management, the world's largest asset manager BlackRock (NYSE: BLK  ) generates fees by managing customers' money. Over 85% of BlackRock's revenues are derived this way. W