From Zeroes to Heroes

Between December 27, 2006 and March 5, 2009, the combined market value of Bank of America and Citigroup crumbled over 95%, destro in! rou!hl "#92 billion of shareholder wealth$ Durin! this time% JPMorgan Chase bou!ht the flounderin! Bear &tearns and 'ashin!ton Mutual$ (ehman Brothers filed for bankru)tc $ Bank of *merica made the ill+advised ac,uisitions of Merrill ( nch and -ountr wide as the ver!ed on failure$ .he /$&$ !overnment took control of Fannie Mae and Freddie Mac to kee) them from im)lodin!$ Wells Fargo )urchased the stumblin! 'achovia, one of the nation0s lar!est retail banks$ AIG received a bailout of well over "100 billion$ 2earl 50 3D4-+insured banks failed$ -iti!rou) re)orted an annual loss of more than "27 billion in 2005$

*nd et, here0s a look at how the Bi! 3our /$&$ banks have fared versus the &67 500 since those dreadful da s%

*ll four of these me!a+banks were )la!ued with to8ic assets and uncertain futures but have still mana!ed to crush the market and reward savv investors$ 'hile the returns have been stellar thus far, the sector still offers massive o))ortunit to those investors who know what to look for when identif in! the ne8t bank read to trounce the market$ -lick below to read about the five thin!s that make a bank !reat$

!hings !hat Make a Bank Great

Before the introduction of e8otic derivatives and com)le8 tradin! al!orithms, bankin! was seen as a relativel borin! business$ 9ven toda , the core function of bankin! remains the same as it has for hundreds of ears% 7rovide consumers with a safe )lace to kee) their mone and earn a little bit of interest, and then, turn around and loan those funds out at a hi!her rate to businesses and consumers hun!r for loans$

"# Making the most of its assets

.he ,uickest wa to identif a su)erior bank is to look at its return on assets :;<*=$ ;eturn on assets is sim)l a bank0s net income over its total asset base$ B lookin! at this ratio, we can more meanin!full com)are a bank with ">00 billion in assets to one with onl ">0 billion$

4f Bank * is earnin! a return of 1$0% on its assets, and Bank B is onl musterin! 0$5%, Bank * is !eneratin! more income from the loans and other investments it holds on its books as assets$

$# %i&ersif'ing the re&enue mi(

*lthou!h the bread+and+butter business for banks is makin! loans, revenue from loans and investments does not tell the whole stor of a bank0s bottom line$ <utside of interest income, man banks rake in )rofits in the form of fees on )roducts or services$ .hese fee+)roducin! services can include investment bankin!, de)osit accounts, or commercial bankin! )roducts such as check )rocessin! or wire transfers$ B offerin! these )roducts and services, a bank is able to reduce its de)endence on a favorable interest rate environment when attem)tin! to !row revenue and net income for its shareholders$

)# %isciplined spenders
4f shareholders ho)e to see an )rofit from all of this revenue !eneration, the need to make sure the mana!ement at their bank has a !ood handle on costs$ .he sim)lest wa to measure a bank0s abilit to mana!e costs is the efficienc ratio$ .he efficienc ratio looks at the bank0s e8)enses as a )ercenta!e of revenue ++ like a !olf !ame, the lower, the better$ 4f a bank re)orts an efficienc ratio of 50%, that means its costs the bank "0$50 to !enerate "1 of revenue$ 4f a bank is s)endin! too much on )h sical branch locations, or )a in! its investment bankers too much, the efficienc ratio will )oint out which bank isn0t )rudentl mana!in! its e8)ense line$

*# Building &alue o&er time

4n theor , at the end of the da , bank shareholders la claim to the difference in value between the bank0s assets and liabilities?intan!ibles, or its tan!ible book value$ *s a bank0s tan!ible book value !rows, its shareholders benefit$ * bank0s book value !rows as its investments increase in value and as it retains earnin!s$ 3rom an investor0s )ers)ective, he or she will want to invest in a bank that has a consistent track record of !rowin! its book value or has a strate! to do so in the future$ &hareholders can also benefit from dividends and share bu backs, which reduce book value but still !enerate returns@

# !he In&isi+le Moat

Aenr 3ord once said, BCou can0t build a re)utation on what ou are !oin! to do$B /nlike a launchin! dail deals website or startin! a .+shirt com)an , the barriers of entr into the bankin! world are incredibl hi!h$ .he tallest hurdle a new bank has to overcome is !ainin! trust with its

customers and establishin! its re)utation in the market)lace$ Banks can sa the have valuable services for customers, but until the )rove it, the bank will !o nowhere$ *lthou!h man banks offer vanilla loans and similar bankin! )roducts, the differentiatin! factor can come down to the culture of a bank and its mana!ement$ 4f a bank is suddenl known for im)ro)er credit )rocesses, conflicts of interest, or deceitfulness, the dama!e to the bank0s bottom+line and shareholders could be irre)arable$ -lick to the ne8t )a!e to see how the Bi! 3our /$&$ banks stack u) in these cate!ories$

!he Big Four

.he Bi! 3our /$&$ banks, 'ells 3ar!o, Bank of *merica, -iti!rou), and D7Mor!an -hase, are constantl lum)ed to!ether and referred to as if the were one entit $ Aowever, under the surface, these banks have )roduced vastl different returns and hold differin! visions$

Wells Fargo
4ncludin! dividends, 'ells 3ar!o has been the best bi! bank stock to own since the financial crisis$ Aavin! avoided the )itfalls of havin! an overlevera!ed ca)ital markets business and to8ic investments, 'ells 3ar!o was able to remain )rofitable durin! the crisis and scoo) a stru!!lin! 'achovia to boost its consumer bankin! and investment bankin! )resence in the )rocess$ 'ells 3ar!o0s annual return on assets durin! this time never dro))ed below 0$6%@ Des)ite its net interest mar!in fallin! for three strai!ht ears, 'ells 3ar!o !rew total revenue ever ear

throu!h its fee businesses, includin! investment bankin!, mort!a!e bankin!, and trust income$ .he bank remained disci)lined on e8)enses, as well, and now boasts an efficienc ratio in the hi!h 50% ran!e$ (on! known as 'arren Buffett0s favorite bank and Berkshire Hatha,a'0s lar!est stock holdin!, 'ells 3ar!o has continuall )leased the <racle of <maha b !rowin! its tan!ible book value at a com)ound annual rate over the last five ears of 15%$ (ed b lon!time 'ells veteran Dohn &tum)f, the &an 3rancisco+based bank seems )oised to maintain its market dominance$

Bank of America
7erha)s no bank0s re)utation emer!ed from the financial crisis ,uite as battered as Bank of *merica0s$ Before the crisis, Bank of *merica was viewed as a well+run, coast+to+coast bankin! em)ire built b &outhern !entlemen$ *fter the crisis, that assessment chan!ed drasticall $ 7la!ued b inherited troubles from Merrill ( nch and -ountr wide 3inancial, Bank of *merica has stru!!led to remain )rofitable after massive write+downs and billions of dollars in le!al fees and settlements$ .he return on assets has been ab smal ++ a mere 0$1% in both 2011 and 2012@

Des)ite the )altr returns on assets, the stock )rice has sur!ed$ 4nvestors still believe that under the bank0s recent weakness, an enormousl )owerful and )rofitable franchise still e8ists$ .he stock )rice toda )artiall reflects the market0s e8)ectation that the bank will increase earnin!s markedl as it works off defaulted loans, settles le!al entan!lements, and brin!s down its efficienc ratio$ *rmed with a massive retail customer base and a world+class investment bankin! and ca)ital markets business, Bank of *merica has the revenue mi8 to thrive in a !rowin! econom $ *s -9< Brian Mo nihan cuts costs and the bank0s le!al issues diminish, shareholders should see more revenue fall to the bottom line, or be returned in the form of dividends or share bu backs$

Citigroup
-iti!rou) ma be the first com)an that comes to mind when someone utters the )hrase Bd sfunctional financial con!lomerate$B *fter ears of !ar!antuan mer!ers, -iti!rou) nearl crumbled durin! the financial crisis after waves of credit losses and fear over the o)acit of its o)erations$ &hareholder e,uit was decimated b a massive net loss in 2005, et -iti!rou) has returned to )rofitabilit , and its stock )rice has sur!ed hi!her in the wave of the crisis$ 9ver bank has a uni,ue advanta!e or ed!e, but )erha)s no bank has the com)etitive moat that -iti!rou) has$ Des)ite bein! a B/$&$B bank, the maEorit of its revenues come from outside of the /$&$ .he bank boasts an un)aralleled network of retail and cor)orate clients around the world$ Des)ite continued write+downs in some older, to8ic assets and stubbornl hi!h e8)enses, -iti!rou) has been able to !row book value )er share in recent ears and could have enormous o))ortunit around the world if it can continue to streamline its o)erations and take )rudent risks$

JPMorgan Chase
*fter an embarrassin! fiasco known as Bthe (ondon 'haleB in 2012, D7Mor!an and its brash -9< Damie Dimon have come under attack for la8 mana!ement and ineffective risk controls$ But the criticism ma overshadow the bank0s stron! )erformance$ *rmed with the world0s lar!est investment bank b revenue as well as countless other world+class businesses, Dimon and team have continued to earn record )rofits and )ost returns of nearl 1% on its massive "2$# trillion asset base$ /)on first !lance, one mi!ht wonder wh D7Mor!an has under)erformed the three other bi! /$&$ banks since March 2009$ .he answer is not because of lack of book value !rowth or runawa s)endin! on investment banker bonuses, but rather, it0s because the bank0s stock wasn0t beaten down as much as some of the others thanks to its )re+crisis stren!th@ 9ven throu!hout the crisis, D7Mor!an never re)orted an un)rofitable ,uarter$

.he D7Mor!an name and business model are durable and have withstood numerous recessions !oin! all the wa back to when D$7$ Mor!an himself built the )owerhouse in the late 1500s$ (osin! billions durin! the (ondon 'hale fiasco made headlines, but it would take a heck of a lot more to knock this behemoth off the to) of the bankin! mountain$ -lick to the ne8t )a!e to find three banks ou can bu toda $

Bigger Isn-t Al,a's Better. ) /maller Banks 0ou Can Bu' 1ight 2o,
.he too+bi!+to+fail banks !et all the )ublicit , but savv investors can find com)ellin! o))ortunities elsewhere in the sector$ 'hile the behemoths tr and fend off cri))lin! re!ulation and restrictions, the maEor re!ional banks ma be well+)ositioned to swoo) in and !rab market share and )rofits$

/pra,ling the 3ast Coast

.he bankin! industr has a histor of maEor consolidation ++ that tradition has been carried on b P2C Financial /er&ices :2C&9% 72-=$ Because of its balance sheet stren!th, when the financial markets ,uaked in 2005, 72- was able to take advanta!e of weaker )la ers and !obble u) market share$ .he bank ac,uired Bank*tlantic to broaden its 3lorida o)erations, 3la!star Bank to stake its claim in Feor!ia, and finall , in 2012, ac,uired ;o al Bank of -anada0s /$&$ bankin! o)erations, which s)read across the &outheast re!ion$ 2ow, the bank has said it doesn0t foresee makin! an maEor )urchases in the near future, and it0s read to !et down to business$ *fter )ostin! a return on assets of 1$0%+)lus for each of the last three ears, 72- is settin! its si!hts on ca)turin! business bankin! customers in an area dominated b 'ells 3ar!o and Bank of *merica$ 72- is smaller, fresher, and more nimble than its massive com)etitors and a))ears )oised to )ut its arsenal of )roducts and services to use in order to !row its book value and return even more ca)ital to shareholders$

/peaking of regional +anks

1egions Financial :2C&9% ;3= was hit es)eciall hard durin! the recession because of the markets it serves$ Most of its branches are in 3lorida, .ennessee, *labama, Feor!ia, and (ouisiana$ .he bank was un)rofitable from 2005+2011 as man of its loans soured$ 4t was also one of the last banks to re)a its .*;7 bailout$ But those factors are what still make ;e!ions a com)ellin! stock toda $ 4n the face of a beaten+down valuation, the bank )osted a ;<* of 0$9% in 2012 and drasticall reduced the amount of funds it set aside for loan losses$ .he most im)ortant thin! for ;e!ions to do toda is remain disci)lined, make loans to creditworth customers, and mana!e its balance sheet in a wa that )rotects shareholders$

.he bank stru!!led mi!htil after the crisis, but it a))ears to be back on the ri!ht track$

/mall and Po,erful

*fter swimmin! throu!h the vast oceans of B of *0s and D7Mor!an0s "2 trillion+)lus balance sheets, a bank with an asset base of onl "56 billion ma seem like a minnow ne8t to those whales$ Des)ite its diminutive siGe, Huntington Bancshares :2*&D*H% AB*2= should be a feared adversar $ (ike 72-, Auntin!ton feasted on smaller )la ers that were des)erate durin! the de)ths of the recession$ &ome investors worr that the bank made too man ac,uisitions, but its -9<, &te)hen &teinour, has a histor of makin! successful ac,uisitions at )revious banks$ 9ven while welcomin! all of these banks under its umbrella, the bank hasn0t for!otten about its customers$ Auntin!ton )uts an e8tra em)hasis on servin! its customers and levera!in! all of its services to fit ever need$ 'ith its customers in mind, Auntin!ton offers services in select !rocer stores and offers a 2#+hour !race )eriod for accounts that overdraft$ <ver 2#0,000 households are Auntin!ton customers, and a sta!!erin! 76% of those households use four or more of the bank0s )roducts$ 'hile none of these re!ional banks are home to armies of suave investment bankers or flash traders, all three can be )owerful )rofit en!ines that consistentl !row book value, minimiGe costs, and allow shareholders to slee) )eacefull at ni!ht$