Some of the world’s regional banks that have side-stepped the global credit crisis are taking advantage of the crisis by acquiring weaker brethren at bargain prices.
That puts four of them on global money managers’ recommended lists: two U.S. regional banks — Minneapolis-based U.S. Bancorp and San Francisco-based Wells Fargo & Co. ; and two Spain-based regional banks — Banco Bilbao Vizcaya Argentaria SA and Banco Santander SA.
All four are big, well-managed and well-capitalized banks with strong brands. They rely on deposits for funding and focus on traditional banking. (None are involved in investment banking, for instance.) Their loan-loss provisions are rising with the recession, but they haven’t experienced the big writeoffs that have crippled many of their brethren.
So, as no one is certain when the credit crisis will ease and global growth resume (most analysts expect it to be the second half of this year), these four banks provide opportunities for clients with medium-term horizons who aren’t looking for quick returns and who want to diversify beyond Canada. Canadian banks are considered the strongest in the world at the moment.
Both BBVA and Santander have benefited from the strict regulation and accounting rules in Spain. As a result, says Richard McGrath, senior investment analyst and portfolio advisor with AGF International Investors Inc. in Dublin, the two Spanish banks have no exposure to U.S. subprime or off-balance sheet liabilities and, early on, both had increased provisions for loan losses.
As well, Santander and Wells Fargo have already made major acquisitions. In the past year, U.S. Bancorp has acquired two small banks and is searching for other good deals. BBVA made its purchases prior to the crisis, so it isn’t as hungry.
None of these four banks’ domestic markets are in good shape, however. Spain is suffering from a burst housing bubble and has more vacant residential properties than the U.S., says Charles Burbeck, an independent global portfolio manager in London, despite Spain’s much smaller size. And, as a result of recent acquisitions, Santander also has substantial exposure to Britain, whose economy is in very rough shape.
Santander’s and BBVA’s Latin America operations provide some offset, although economic growth in Latin America is now slowing.
U.S. Bancorp and Wells Fargo are both purely domestic banks. Their strength comes from conservative and prudent financial management, efficient operations, strong brands and avoidance of subprime mortgage exposure. Both banks have been able to raise interest margins, Burbeck says, because of a “flight to safety” as consumers and businesses move funds to banks they believe are strong and safe. Wells Fargo is also particularly adept at cross-selling to customers, he adds, as is witnessed by its high average number of products per customer.
A closer look at the four banks:
> Banco Bilbao Vizcaya Argentaria SA is the second-largest bank in Spain, with assets of 528.8 billion euros as of Sept. 30, 2008. It is also the country’s largest mortgage provider.
BBVA is very strong and growing fast in Mexico — a plus, as margins in Mexico are higher than in most industrialized countries, says McGrath, who likes the stock. BBVA is also in Argentina, Chile and Venezuela and has a 30% market share in pension funds assets in the region.
As a result of recent acquisitions, BBVA has a presence in the southern U.S., where it targets the region’s large Hispanic population for whom a Spanish bank is appealing. Burbeck notes that the network includes branches close to the Mexican border, putting BBVA in a position to take advantage of cross-border money flows.
Nevertheless, Burbeck, doesn’t recommend taking a big position in BBVA at the moment. Even though he thinks its stock will outperform the global banking sector, he doesn’t expect the global banking sector to outperform the market. As well, economic conditions in Spain and Latin America will keep a lid on BBVA’s earnings in the short term.
Nor is a report from the London office of UBS Ltd. enthusiastic about BBVA. The Oct. 27, 2008, report rated BBVA “neutral” with a 12-month price target of nine euros a share. The bank’s stock closed at 8.82 euros a share on Jan. 9, down from a high of 20.29 euros in February 2007.
Although the UBS report agrees with Burbeck that BBVA is well managed, the report points to “significant macro challenges” in the markets in which it is operating: “real estate/excessive household leverage in Spain and the U.S., as well as severe currency and economic fluctuations in Latin America.”
@page_break@A Nov. 12 report from the London office of J.P. Morgan Securities Inc. also downgraded BBVA to “neutral” from “overweight” based on what analysts expect to be “below average” growth for the bank: “Although we are valuing the bank’s sound operating performance under challenging conditions, and despite its long-term attractive franchises, we believe our relative preference for BBVA vs European peers is no longer justified.”
BBVA reported net income of 4.5 billion euros in the nine months ended Sept. 30, 2008, on revenue of 15.3 billion euros. That compares with net income of 4.8 billion euros in the same period a year earlier on revenue of 13.5 billion euros. Loan-loss provisions were 2.0 billion euros in the nine months vs 1.3 billion euros a year earlier.
As of Sept. 30, total balance-sheet assets were 528.8 billion euros, debt was 102.1 billion euros, shareholders’ equity was 26.6 billion euros and its Tier 1 capital ratio — a bank’s core equity capital as a percentage of its risk-weighted assets — was 7.8%. There are 3.7 billion widely held shares outstanding.
> Banco Santander SA. McGrath likes the way Santander “is using the global credit crisis turmoil to pick up good-quality franchises at low valuations.”
This past September, wholly-owned subsidiary Abbey National PLC of Britain bought the retail deposits and branch network of Bradford & Bingley PLC, also of Britain, when the latter was nationalized. Then, in October, Santander acquired Alliance & Leicester PLC, another Britain-based bank hit hard by the credit crisis.
Burbeck likes these deals, noting that Santander has cut costs aggressively at Abbey, substantially increasing efficiency; it will no doubt do the same at B&B and A&L.
Burbeck, however, is less enthusiastic about another October purchase: all the shares Santander did not already own of struggling Philadelphia-based Sovereign Bancorp Inc. Burbeck wonders how the Sovereign purchase fits into Santander’s strategy, given that Sovereign is mainly in the U.S. northeast, which doesn’t have as large an Hispanic population as the U.S. south. That deal is set to close in the first quarter of 2009.
But Tim Johal, a portfolio manager with I.G. Investment Management Ltd. in Winnipeg, takes a more positive view. All the acquisitions, he maintains, should be accretive to earnings in the coming years. He expects Santander to continue to acquire banks globally and feels that its stock trades at an “undeserved discount” to its Spanish peers.
Another factor, McGrath notes, is that Santander has one of the strongest franchises in Brazil, a country with high margins and strong growth, and a substantial presence in Mexico. In addition, Santander offers full-service banking in Portugal and consumer finance operations in Germany and Italy.
A Nov. 27 UBS report upgraded the stock’s rating to “neutral” from “sell” with a 12-month price target of six euros; it closed at 6.98 euros on Jan. 9, down from a high of 15.23 euros in November 2007.
In the nine months ended Sept. 30, Santander reported net income of 6.9 billion euros on revenue of 22.5 billion euros, vs net income of 6.6 billion euros on revenue of 19.9 billion euros in the same period the previous year. Loan-loss provisions were four billion euros in the nine months vs 2.4 billion euros a year earlier.
As of Sept. 30, Santander had total assets of 953 billion euros; debt of 258 billion euros; shareholders’ equity of 57.6 billion euros and a Tier 1 capital ratio of 7.9%. It is widely held, with 2.3 billion common shares outstanding.
> U.S. Bancorp is the sixth-largest U.S. bank in terms of assets, operating in 25 states with 2,400 branches. In addition to banking products, U.S. Bancorp provides insurance, investments, mortgages, and credit card payment and processing services.
“[U.S. Bancorp] somewhat transformed itself in the early part of this decade,” Johal notes, “by choosing to ‘de-risk’ parts of its balance sheet, sell off its investment-banking business and maintain a disciplined approach to risk in its lending.” Nevertheless, he says, it has grown in line with its peers but now has much less risk.
U.S. Bancorp, which received US$6.6 billion in funds from the U.S. Troubled Assets Relief Program, is in a position to acquire a “sizable stressed institution in a highly accretive transaction in the near future,” Johal says. (All figures in reference to U.S. Bancorp and Wells Fargo are in U.S. dollars unless otherwise noted.) Johal notes that U.S. Bancorp acquired two small California-based distressed banks in 2008 that should prove “highly accretive” to earnings.
McGrath calls U.S. Bancorp’s stock a bargain at its current price. But Burbeck doesn’t agree; nor does a UBS report dated Dec. 11, 2008, which rates the stock “neutral.” It should be noted, however, that the stock price has fallen since that report, closing on Jan. 9 at $22.35 a share, considerably lower than the UBS report’s 12-month price target of $26 a share. The stock traded as high as $42.23 this past September. Berkshire Hathaway Inc. owned 4.2% of the shares as of Sept. 30.
J.P. Morgan’s Dec. 5 report also rates U.S. Bancorp’s stock “neutral,” noting that the bank “seems to be more interested in out-of-market rather than in-market deals, especially in the Southeast.” The report adds that U.S. Bancorp is also interested in “sizable overseas acquisitions” but appears willing to wait for a willing seller.
U.S. Bancorp reported net income of $2.6 billion in the nine months ended Sept. 30 vs $3.3 billion in the same period the year prior. Nine-month revenue was $11.1 billion, up from $10.5 billion in 2007. Loan-loss provisions were $1.8 billion as of Sept. 30 vs $567 million in the same period a year earlier.
As of Sept. 30, U.S. Bancorp had total assets of $247.1 billion, long-term debt of $40.1 billion, shareholders’ equity of $21.7 billion and a Tier 1 capital ratio of 8.5%. It has 1.8 billion widely held common shares outstanding.
> Wells Fargo & Co. Johal describes Wells Fargo as “a high-quality bank with a disciplined and proven management team that has been able to grow assets and income at above-average rates over the long term while maintaining above-average profitability.”
During the economic crisis, he notes, the bank “has been able to continue to grow while its competitors have pulled back, resulting in better profitability.” As a result, he predicts, Wells Fargo will emerge from the credit crisis and recession “bigger and more profitable” than ever.
Wells Fargo, which received $25 billion in TARP funds in exchange for 25,000 preferred shares, acquired Charlotte, N.C.-based Wachovia Corp. at a bargain price in a deal that closed on Dec. 31, making Wells Fargo the fourth-largest U.S. bank in terms of assets. Johal expects this deal to be highly accretive to earnings, both because of the low price paid and the “sizable cost synergies expected.”
Burbeck also likes the Wachovia deal; it gives Wells Fargo a national network and makes it the second-biggest bank in terms of deposits (behind New York-based Bank of America).
But while Burbeck commends Wells Fargo’s strong management team for selling its options business before the credit crisis, he doesn’t consider the stock cheap.
Likewise, a Nov. 5 UBS report rated the stock “neutral” with a 12-month price target of $32 a share, still well above that $25.14 at which it closed on Jan. 9 but down from a high of $44.75 this past September. Berkshire Hathaway Inc. owned 7.8% of the shares at Sept. 30.
Wells Fargo reported net income of $5.4 billion in the nine months ended Sept. 30 on revenue of $32.4 billion; that compares with net income of $6.7 billion on revenue of $29.2 billion in the same period the previous year. Loan-loss provisions were $7.5 billion in the nine months vs $2.3 billion a year earlier.
Total assets as of Sept. 30 were $622.4 billion; long-term debt was $107.4 billion, shareholders’ equity was $47 billion and its Tier 1 capital ratio was 8.6%. It has 3.3 billion widely held outstanding shares. IE
Strong regional banks can benefit from acquisitions
These well-managed and well-capitalized banks have strong brands and focus on traditional banking activities
- By: Catherine Harris
- January 26, 2009 October 31, 2019
- 10:20