Investor's Checklist: Banks

The business model of banks can be summed up as the management of three types of risk:  credit, liquidity, and interest rate.

Investors should focus on conservatively run institutions.  They should seek out firms that hold large equity bases relative to competitors and provision conservatively for future loan losses

Different components of banks' income statements can show volatile swings depending on a number of factors such as the interest rate and credit environment.  However, well-run banks should generally show steady net income growth through varying environments.  Investors are well served to seek out firms with a good track record.

Well-run banks focus heavily on matching the duration of assets with the duration of liabilities.  For instance, banks should fund long-term loans with liabilities such as long-term debt or deposits, not short-term funding. Avoid lenders that don't.

Banks have numerous competitive advantages.  They can borrow money at rates lower than even the federal government.  There are large economies of scale in this business derived from having an established distribution network.  the capital-intensive nature of banking deters new competitors.  Customer-switching costs are high, and there are limited barriers to exit money-losing endeavors.

Investors should seek out banks with a strong equity base, consistently solid ROEs and ROAs, and an ability to grow revenues at a steady pace.


Comparing similar banks on a price-to-book measure can be a good way to make sure you're not overpaying for a bank stock.


Ref:  The Five Rules to Successful Stock Investing by Pat Dorsey


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Investor's Checklist: A Guided Tour of the Market...

Revenue Drops 62% as Morgan Stanley Posts a Loss

Revenue Drops 62% as Morgan Stanley Posts a Loss

By DAVID JOLLY
Published: April 22, 2009
Morgan Stanley reported a bigger-than-expected first-quarter loss on Wednesday, as it wrote down soured real estate investments and took a hit on its own debt.
The bank reported a net loss of $177 million, or 57 cents a share, compared with a profit of $1.4 billion a year ago. Revenue fell 62 percent to $3 billion. Analysts surveyed by Reuters had expected a loss of about 9 cents a share and revenue of about $4.9 billion.
Results were helped by a one-time tax benefit of $331 million “from the anticipated repatriation of non-U.S. earnings at lower than previously estimated tax rates.”
Morgan Stanley said its results were hurt by a $1.5 billion decrease in net revenue related to the tightening of credit spreads on certain of its long-term debt and “net losses of $1 billion on investments in real estate, amidst the industry-wide decline in this market.”
Like its larger rival, Goldman Sachs, Morgan Stanley in September converted itself into a bank holding company from an investment bank in order to gain access to emergency Federal Reserve funds. Accounting rules governing holding companies required the banks to change their reporting periods to the calendar year from a Nov. 30 year-end, leaving December as an orphan month.
Morgan Stanley reported a net loss of $1.3 billion for December.
Goldman Sachs last week posted a net profit of $1.7 billion for the first quarter of 2009. For December, it lost $1 billion.
Morgan Stanley also cut its quarterly dividend to 5 cents a share from 27 cents, saying the move would allow it to conserve about $1 billion a year.
Some investors have greeted bank results in the last weeks with optimism, seeing in better-than-anticipated headline numbers signs that the financial industry is stabilizing. But many analysts have cautioned that one-time items and liberal accounting were allowing banks to dress up what would otherwise, considering the continuing deterioration of asset values, have been a bad quarter.
American banks face great uncertainty as the Treasury and financial regulators work out how they will disclose the results of stress tests of 19 large banks. American banks had reported $510 billion in write-downs related to the credit crisis by the end of 2008, the International Monetary Fund said Tuesday, and it predicted they would need to write-down an additional $550 billion in 2009 and 2010.
In spite of difficult business conditions, Morgan Stanley “delivered strong results in investment banking, commodities, interest rates and credit products as well as solid performance in global wealth management,” John J. Mack, the chairman and chief executive, said in a statement. “In fact, Morgan Stanley would have been profitable this quarter if not for the dramatic improvement in our credit spreads — which is a significant positive development, but had a near-term negative impact on our revenues.”
Morgan Stanley said it had a Tier 1 capital ratio, a measure of financial strength, of 16.4 percent at the end of the first quarter. It said its investment banking business had revenue of $800 million, and that it ranked first globally in announced mergers and acquisitions in the first quarter. The bank said its fixed income sales and trading business posted revenue of $1.3 billion reflecting strong results in commodities, interest rates and credit products.
Goldman Sachs said last week that it wanted to return $10 billion in federal bailout money received under the Troubled Asset Relief Program, or TARP, as soon as possible to rid itself of the restrictions on executive pay and other matters. Morgan Stanley’s loss might make it more difficult for it to follow suit in the near term. For its part, Goldman Sachs is awaiting Treasury Secretary Timothy F. Geithner’s approval before it can do so.
Like its rivals, Morgan Stanley has also benefited from an indirect subsidy in the form of Federal Deposit Insurance Corporation backing for their debt issues, which allows them to raise money far more cheaply than they could on their own. Morgan Stanley has issued $23 billion of debt under the program.
Morgan Stanley, which sold a 21 percent stake to Mitsubishi UFJ Financial Group in September for $9 billion, entered a joint venture this year with Citigroup’s Smith Barney brokerage unit to expand its brokerage business.
It also announced a new joint venture with Mitsubishi UFJ integrating the two firms’ Japanese securities businesses into the third largest brokerage franchise in Japan.
Mr. Mack told a Japanese newspaper this week that Morgan Stanley also wanted to buy an American retail bank to gain deposits.
The bank has a market value of about $27 billion. Its shares, which had gained about 54 percent this year through the market close Tuesday, fell about 2 percent in premarket trading Wednesday.
Louise Story contributed reporting.

http://www.nytimes.com/2009/04/23/business/23bank.html?ref=business

Pandit: Citi undergoing "long-term transformation"

Pandit: Citi undergoing "long-term transformation"
By MADLEN READ, AP Business Writer Madlen Read, Ap Business Writer

NEW YORK – Citigroup's CEO Vikram Pandit said Wednesday that the company is going through a "long-term transformation," a day after the embattled bank sold control of its Smith Barney brokerage to Morgan Stanley.
Speculation has been growing that Pandit, who for months supported the model of Citigroup as a "universal bank," will be taking further steps to dismantle the conglomerate.
"While we are embarked on a long-term transformation of Citi, our core mission is unchanged," Pandit wrote in a memo to employees obtained by The Associated Press.
"Our goal is to streamline our operations, strengthen our balance sheet, position ourselves to take advantage of historic global growth opportunities, and deliver to clients all the benefits of our strength, insight, and unique global reach."
Analysts are expecting more details about which businesses Citigroup plans to jettison when the company releases fourth-quarter results on Friday — nearly a week earlier than originally planned.
Citigroup shares fell $1.37, or 23 percent, to $4.53 on Wednesday.
On Tuesday, Morgan Stanley and Citigroup agreed to merge their retail brokerages. Morgan Stanley is paying Citigroup $2.7 billion for a 51 percent stake in the joint venture. Citigroup will have a 49 percent stake. The new unit — Morgan Stanley Smith Barney — will have more than 20,000 advisers, $1.7 trillion in client assets; and serve 6.8 million households around the world, the companies said.
Citigroup will recognize a pretax gain of about $9.5 billion because of the deal.

http://news.yahoo.com/s/ap/20090114/ap_on_bi_ge/citigroup_ceo;_ylt=AqZ31iUOTghy9MXvY3OOhYiyBhIF