Many investors are hesitant to get involved in the banking sector, and who could blame them? Although some banks are risky investments, not all of them fall into that category. Here are three banks you can buy and hold for the long haul.
Buffett's favorite, and for good reason
US Bancorp (NYSE:USB) is regarded as one of the best-run banks in the world, and is a longtime favorite of Warren Buffett. At first glance, US Bancorp looks to be rather expensive, trading at a significantly higher price-to-book multiple than most of its peers. However, just like with many other things, when buying bank stocks, you get what you pay for.
US Bank runs one of the most efficient operations in the world among branch-based banks, with a return on equity of 14.1%, a return on assets of 1.44%, and an efficiency ratio of 54.3% (lower is better), well above the industry averages of 9.4%, 1.05%, and 66.6%, respectively.
The bank is also doing a great job of growing its operations, and improving its asset quality even more. Over the past year, US Bank's loan portfolio has grown by 5.1%, and deposits have grown by 8.1%. The portfolio is growing with high-quality loans, evidenced by the 18.2% year-over-year drop in the net charge-off rate.
For great banks, look to the north
The larger Canadian banks are some of the most rock-solid financial institutions in the world, and Bank of Nova Scotia (NYSE:BNS), more commonly known as Scotiabank, is a great example.
First of all, the bank is geographically diverse, meaning that it doesn't depend too heavily on any one economy (even Canada's). Scotiabank serves 19 million customers in 55 countries all around the world, and international operations include a focus on such promising economies as Mexico, Peru, Chile, and Colombia.
Scotiabank has strong asset and credit quality (A-plus credit rating from S&P), and runs an extremely efficient operation. The bank operates at a ROE of 14.2%, and has produced extremely strong earnings and dividend growth over the past few decades. In fact, the bank actually aims to produce even better returns, with a medium-term goal of 15%-18% ROE. Considering that the bank's 20-year average total return is 15.9% per year, including one of the worst banking crashes in history, this doesn't seem far-fetched at all.
Perhaps the best thing about Canadian banks is they've gotten cheaper lately, thanks to currency headwinds (U.S. dollars have gotten stronger relative to Canadian).
The biggest and best, but not done yet
Larger companies do have somewhat of an advantage over rivals -- they tend to benefit from better brand recognition and can use economies of scale to operate more efficiently. In banking, Wells Fargo (NYSE:WFC) is the biggest by several metrics (including market cap) but the growth doesn't seem to be done just yet.
Wells Fargo is the only one of the "big four" that operates mostly like a traditional savings and loan, which makes its revenue more stable than others that rely on say, investment banking. The bank has produced strong growth and returns for shareholders over the past few decades, and has built several areas of its business into market leaders, such as its mortgage and auto lending businesses.
The main reason I like Wells Fargo as a "forever stock" is that it has been successful so far in its quest to become its customers' only bank. Wells prides itself on its ability to cross-sell its products, and its average banking household has more than six separate products with the bank, and Wells Fargo has stated its goal to increase this amount to eight. The average household had a total of about 16 banking products with different companies, so this is an achievable goal. For example, over the past year, Wells Fargo has increased the percentage of its customers with a Wells-issued credit card from 38% to nearly 42%.
Similar to what Apple has done with consumer electronics, Wells Fargo is attempting to build an enormous customer base who will look to the company for all of their banking needs.
The proof is in the performance
For all three of these banks, the track record of performance says it all. Not only did all three handily beat the performance of the overall financial sector during the crisis, but all three have delivered sector-beating returns since. In fact, over the last decade (including the crisis), the overall financial sector has produced a total return of just 8.5%, while US Bank, Bank of Nova Scotia, and Wells Fargo have returned 111%, 155%, and 145%, respectively.
What we mean by forever
It's important to note that there is no such thing as a true "forever" stock that you can simply buy and forget about. There can be fundamental changes to any company or industry over time that can make the stock less favorable to own. Investors should always do their homework and re-evaluate all of their stocks regularly.
Having said that, there is no reason to believe that any of these three banks will become anything less than a fantastic investment anytime in the foreseeable future. These stocks can give your portfolio exposure to the best of the best in the banking sector, while giving you peace of mind of knowing that your investment dollars are in good hands.