Bank investing is a tough business. Banks are highly leveraged, they release precious few details about their massive balance sheets, and their profits swing wildly at the whim of businesses and individuals paying or not paying their loans.
That said, picking bank stock winners over the long term can be done. In my opinion, these three banks are the best-in-breed stocks with the best chance of paying off handsomely in 10 years and beyond.
For a discussion of the criteria I consider critical for long-term success in banking, click here.
1. First Republic Bank
First Republic Bank (NYSE:FRC) is a regional bank headquartered in San Francisco, but it operates in just seven coastal urban markets on the east and west coasts. Their niche, put simply, is to bank the 1%.
This customer base gives the bank a number of key advantages. First and foremost, the ability of the rich to repay their loans is about as good as it gets, and that makes sense logically. The bank's typical mortgage loan has a 40% down payment, and the average borrower has a credit score of 774, a net worth of $2.5 million, and liquid assets in excess of $583,000.
The wealthy also provide First Republic with ample opportunity to build low-risk supplemental income streams based on many financial needs that come with wealth. The bank has a very fast-growing wealth management division, as well as strong business lending, cash management, and brokerage businesses.
And of course, the bank's profits and financial results are pretty impressive. too.
2. M&T Bank
Recently, I reviewed the total return performance of the nation's largest banks going from 1980 to the present. The best performing bank over that period? M&T Bank (NYSE:MTB), the mid-Atlantic-focused regional bank led by CEO Robert Wilmers.
The key to M&T's success over the past 25 years -- and the next 10 -- is the company's constant focus on risk management and expense control.
Many banks overextend themselves when the economy is strong. They pursue higher-yielding, and therefore riskier, assets to boost profits. They sacrifice credit quality for profits and growth. But the economy is cyclical, and when times inevitably get tough, those riskier assets are the ones that lose money. Think subprime loans.
M&T doesn't play that game. Instead, the bank ruthlessly attacks non-productive expenses so that they can hit their profitability targets without chasing those risky, high-yielding assets. The result is consistent performance in good times and bad.
The results speak for themselves.
3. Wells Fargo
I think Wells Fargo (NYSE:WFC), another of the top performing banks over the past 35 years, will continue that strong outperformance.
Wells Fargo operates with a similar philosophy to M&T Bank, in that the bank is committed to building a profitable and sound portfolio. That approach has produced impressive and consistent results over the years. In terms of return on assets and return on equity, Wells is clearly best in breed among the megabanks.
Warren Buffett owns over 463 million shares of the bank, a huge position even by Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) standards. For the Buffett fans reading this, the Oracle of Omaha has talked about his criteria for investing in bank stocks at various points in the past. After studying his methods, it should not comes as a surprise that Wells Fargo checks all the boxes.The bank is efficient, produces a high return on assets, and has been remarkably consistent over time.
What does the future hold for these stocks? Only time will tell. But based on each bank's fundamentals, business model, and commitment to risk management, I think these three bank stocks could be a strong bet for the next 10 years.
Jay Jenkins has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Apple, Bank of America, Berkshire Hathaway, 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.