Drip
Portfolio Report
Tuesday, June 9, 1998
by Dale Wettlaufer ( [email protected])
Alexandria, VA (June 9, 1998) --Pressing forward with the banks we're including in our second round, BankBoston (NYSE: BKB) makes it onto the list. The company is the product of the 1996 merger between Massachusetts retail institution BayBank and commercial and retail bank Bank of Boston. A very interesting feature of the company for longer-term investors (DRIP investors) is the company's international exposure. Whereas the U.S. has a good year if gross national product grows by 2.5% per year, the emerging economies where BankBoston does business have a good year when GNP grows at a rate three times that of the U.S. economy. The risk/reward mix is somewhat different, but the growth is undeniable.
Over the last two years, international revenues have grown at a compounded annual rate of 17.3% and international net income has grown at a compounded annual rate of 22.8%. Domestic operations have exhibited a 2.6% compounded annual growth rate (CAGR) in revenues and an 11.7% CAGR in net income. Managed properly, the company's mix of 78% domestic earnings and 22% international earnings provides good diversification for investors. After all, if it weren't for international operations, Coca-Cola investors wouldn't be nearly as well off.
BankBoston's international operations are primarily directed toward commercial banking, though the company has operated as a retail bank with a well-known brand name in Argentina for 80 years. Of its total asset base, BankBoston's $6.6 billion in Latin American assets represents nearly 10% of the company's total assets. As a stand-alone bank, that would be one of the top-100 banks in the U.S. and is, in fact, the largest U.S. bank in Argentina and Brazil. The company is planning on expanding its Argentine branch network by over 200% this year, to about 140 branches, including the acquisition of Deutsche Argentina. Its Brazilian expansion plan for 1998 is also very ambitious, with plans to expand its branch network by 94%, to 66 branches. Of the company's consolidated net income of $879 million for 1997, Brazil and Argentina alone accounted for $124 million, or 14% of the total.
In Asia, BankBoston is shifting its focus to capital markets activities, which include debt and equity underwriting, foreign exchange and derivatives trading, and trade finance. Last year, the company financed $6.5 billion in exports and imports to Asia, so this is a natural outgrowth of the company's traditional strength and experience in trade finance. Its announced acquisition of Robertson Stephens from BankAmerica will fit nicely with this strategy, as so much investment banking in California has applications across the Pacific Rim.
The meat of the bank is really its Corporate Banking and Capital Markets and its Regional Consumer and Small Business banking operations. The company holds the largest deposit market share in Massachusetts and three-quarters of its branches are located in the Bay State. Like other progressive regional banks, the company has built a large network of 1,500 ATMs and has 68 in-store and mall banking locations. As we see in the following table, though, the company is a significant corporate bank. Its corporate and government loan and lease portfolio heavily outweighs its retail portfolio:
(Dollars in millions) For Fiscal Year Ending December 31, 1997
UNITED STATES
Commercial, industrial and financial.....$15,268
Commercial real estate
Construction.....271
Other.....4,211
Consumer-related
Secured by 1-4 family residential properties.....5,393
Other.....4,712
Lease financing.....1,938
Unearned income.....(302)
Total.....31,491 71.6%
INTERNATIONAL
Commercial and industrial.....8,826
Banks and other financial institutions.....860
Governments and official institutions.....95
Consumer-related residential mortgages.....947
Other.....1,010
Lease financing.....452
All other.....378
Unearned income......(79)
Total.....12,489 28.4%
Total loans and lease
financing.....$43,980
At least 63%, then, of the company's U.S. loans and leases were non-consumer credits and 78% of international loans and leases were non-consumer credits at the end of 1997. Though both BankBoston and BayBank were laid pretty low by the New England real estate crisis that went along with the S&L crisis from the late 1980s into the recession that kicked off the 1990s, the company's domestic commercial real estate loan portfolio still accounts for a large percentage of credits, at about 10% of loans and leases. Compare that with NationsBank, which is the prototype for a diversified superregional bank, whose domestic commercial real estate portfolio accounts for 7.7% of loans and leases. BankBoston's New England and Massachusetts concentration makes its real estate exposure somewhat worrisome, especially given that the real estate market in Boston has shown signs of heated speculation recently.
The last moving part of BankBoston that we want to look at in this preliminary examination of the company is its asset management business. Its Global Private Banking business alone has $23 billion in assets under management, making the company a considerable presence in this market. An integral part of its overseas expansion is growth in asset management to go along with the company's growth in capital market activities.
BankBoston will probably make it to the final six contenders because of its diversified operations and because it is a well-run company. If so, we'll examine its numbers closely when we take a final look.
A final note on dividend yield and owner's yield. BankBoston has returned to shareholders $1,091 million over the last 12 months via dividends on common stock and net buybacks of common and preferred securities. Taken together, that equals an owner's yield of 7.03%, which is the yield of all cash returned to equity holders divided by the current market cap. Looking at yield that way instead of just dividing dividends into the market cap (BankBoston's current dividend yield is 2.1%, according to S&P Comstock) gives an investor a better idea of the total power of the company to return cash to shareholders and the amount of total cash returned to shareholders as a percentage of the current market price.
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