In the current issue of The Journal of Economic Perspectives, economists present data that shows traditional consumer banking and asset management were the forces behind outsized growth in the financial sector over the past 30 years. If this trend continues, which financial services companies are best poised to lead the way?
How much has finance grown, really?
The authors of the report, economists Robin Greenwood and David Scharfstein, first point to the U.S. economy's increasing reliance on financial services for growth. In 1950, financial services contributed 2.8% to GDP, compared to 4.9% in 1980 and 8.3% in 2006.
Source: "The Growth of Finance," The Journal of Economic Perspectives.
The primary driver was a dramatic increase in household debt, primarily mortgages, which increased from 48% of GDP in 1980 to 99% in 2007. The run-up before the real estate bubble aside, the more than doubling of household debt in just 27 years is remarkable.
Consumer banking
Wells Fargo (WFC 2.73%) stands apart among the big banks as the premier mortgage lender. Not only is Wells the largest mortgage lender in the country, it also has a proven track record of conservative underwriting through its strong performance through the financial crisis.
Wells continues to maintain market leading credit metrics, including a 4.9% delinquency rate and a 2.14% foreclosure rate as of yearend 2012, besting Citi (C 0.26%), JPMorgan Chase (JPM 0.65%), and Bank of America (BAC 1.53%).
|
Wells Fargo |
Citigroup |
JPMorgan |
Bank of America | |
|---|---|---|---|---|
|
Delinquency Rate |
4.9% |
5.89% |
7.11% |
9.03% |
|
Foreclosure Rate |
2.14% |
2.7% |
3.06% |
2.73% |
Wells ended Q1 with a pipeline of $74 billion in mortgage loans, after originating $109 billion in the quarter -- its sixth consecutive quarter of $100-billion-plus originations.
Asset management
The increase in asset management, according to Greenwood and Scharfstein, is primarily driven by an increase in the value of equities already under management. This means that growth was not driven by new inflows of money into the asset management firms; instead, industry growth was driven by strong performance in the stock markets.
BlackRock (BLK -0.86%) is far and away the largest money manager with over $3.6 trillion in assets under management (AUM). The company saw quarterly earnings per share increase 16% year over year in Q1, as AUM increased nearly 9%. In line with the thesis laid out by Greenwood and Scharfstein, 98% of the company's increase in AUM, $279 billion, was driven by market gains.
BlackRock reported that 55% of its assets under management were tied to equity holdings, generating 56% of base fees. Based on the data from Greenwood and Scharfstein, we would expect BlackRock's fundamental performance to track with the broader equity markets. However, BlackRock's opportunistic acquisition of Barclays Global Investor (a subsidiary of Barclays) in 2009 added $1.9 trillion to assets under management in Q4 of 2009, skewing a 1 to 1 comparison with the S&P.
The end result is BlackRock appreciating 1,800% since 2000, versus 26% for the S&P.
The trend is your friend, until it bends at the end
Only time will tell if consumer appetites for household credit will return to pre-crisis levels. Investors should watch the trend in household savings and consumer debt levels to see whether consumer behavior returns to pre-crisis patterns. If they do, look to consumer lenders like Wells Fargo to lead growth in the financial services sector.
The opportunity is less clear with asset managers. Because assets under management and fees are so closely tied to equity market performance, a more direct play with a low-cost S&P index fund could be the better investment. However, with history as a guide, look to companies like BlackRock, who find growth through increasing market share to outperform the market and the sector. These companies could be the ticket to beating the S&P for the next 10 years.
