If you want some exposure to the banking sector in your portfolio, you literally have hundreds of choices, ranging from big national banks to regional banks and even small local institutions.
However, there are some companies that make better investments than others. Some have distinct competitive advantages, like innovative products and convenient house, and some just trade for a very cheap valuation, offering lots of potential reward without tons of risk.
Here are three great banks to invest in, and a little about why each one could be a winner.
America's most convenient bank
Toronto-Dominion Bank (NYSE:TD), also known as TD Bank, has aggressively expanded its U.S. operations over the past decade or so, with operations along most of the East Coast. However, the real turning point for TD came when it bought out New Jersey-based Commerce Bancorp in 2008.
Commerce was known as "America's Most Convenient Bank," and TD absorbed this mentality after the takeover. Many TD Bank branches are open seven days a week and close only for a few holidays per year. In some locations, you can even go through the drive-through until midnight, so you can deposit your paycheck even if you have to work late.
While TD has made excellent progress so far, its business model could spread like wildfire through markets where bankers still keep, well, banker's hours.
The biggest, but not done growing yet
Wells Fargo (NYSE:WFC) is the largest U.S. bank by market capitalization, but it still has some pretty ambitious growth plans. The company has been the No. 1 mortgage lender for a few years now and recently overtook Ally as the top auto lender.
Although Wells Fargo is seemingly in every town in America, it has the advantage of being extremely efficient at selling more products to its own customers. The average Wells Fargo customer's household has about six different products with the company, including checking or savings accounts, insurance products, loans, and credit cards.
However, the company is "going for gr-eight", which is Wells Fargo's way of saying they want to bump the average up to eight products per customer. In particular, the company has plenty of room to grow in the credit card business, especially with its recently implemented partnership with American Express. The company has stated that it wants a Wells Fargo-issued credit card in the wallet of every customer, and currently just one-third of the bank's customers have one.
Another area that is growing rapidly and still has room to go is the Wells Fargo Advisors brokerage business, which has gone from being virtually non-existent when Wells bought Wachovia to being a major player in the business. And the business brings in some of the company's best customers. While the average Wells Fargo customer has about six different banking products with the company, brokerage customers have an average of 10. So it's no wonder that Wells is putting emphasis on this area of the business.
Cheap, but for how long?
Finally, Citigroup (NYSE:C) had a pretty tough time during the financial crisis. In fact, the high amount of toxic assets on the balance sheet left many people questioning whether the company would even survive.
Well, fast-forward a few years and Citigroup is in much better financial shape. Citigroup's capital levels are well within the "healthy" range and continue to improve. In fact, the company reported a Basel III Tier 1 common ratio of 10.6%, up from 10% a year ago. This level is the highest among the largest U.S. banks and is well above Citigroup's "target" of 9.5%.
And the toxic assets are steadily being worked off the balance sheet. After the crisis, Citi put all of its "legacy assets" into its Citi Holdings division and began disposing of them. And while there is still $111 billion worth of assets in the division, the company has done a great job of reducing the total amount to a more manageable level.
So while the recovery process continues, Citigroup still trades at an extremely low valuation. In fact, Citigroup shares trade for just 95% of their tangible book value. So you're buying the current assets for less than what they're worth, and any future upside will be a nice bonus.
What to do?
Now, this is by no means a comprehensive list of good investments in the banking sector. There are plenty of companies that have a lot of good things going for them.
However, these three companies all have their own unique advantages that are worth considering, and they would complement each other very nicely in a diverse portfolio. For example, the more rock-solid nature of Wells Fargo and TD Ameritrade helps to balance out the increased risk of Citigroup, which could have the highest reward potential of the three.
So while these are three very different banks, any (or all) of them would make an excellent addition to a well-rounded portfolio.
Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends Apple and Wells Fargo and owns shares of Apple, Citigroup, and Wells Fargo. 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.
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