Winners—Yes, Winners—in Banking

08/07/2008 12:00 am EST


Jim Jubak

Founder and Editor,

Jim Jubak, senior markets editor for MSN Money, finds two banks he thinks will gain from rivals’ woes.

Where there are losers, there are going to be winners.

Today's column is about the financial companies that are best positioned to pick up the pieces. My winners from the financial crisis [include] JPMorgan Chase (NYSE: JPM) and Wells Fargo (NYSE: WFC).

It's not that JPM has been managing its business perfectly during the financial crisis; [but its] mistakes have been much smaller and are supported by a much stronger balance sheet.

For example, it looks like the charge-offs on its $95-billion home-equity portfolio will peak at about $700 million per quarter. That's about a 3% annual rate. No bank ever likes to take a $700 million charge, but it's surely better to be talking about millions with an "m" rather than billions with a "b."

And unlike many of its competitors, JPMorgan Chase doesn't have any need to raise new capital. With a Tier 1 capital ratio of 8.4%, the bank has one of the strongest balance sheets in the sector. It's that strength that let JPM pick up investment bank Bear Stearns for a song in a deal brokered by the Federal Reserve.

The bank hasn't ignored its retail side, either. The 2007 grab for market share in the most distressed mortgage markets may have increased charge-offs for bad debt, but it increased the bank's market share as well. Net revenue at the mortgage banking unit climbed 46% in the second quarter of 2008 from the second quarter of 2007, and net income climbed 138%.

What's ahead? The bank will use its balance-sheet muscle to pick up the businesses it finds most attractive around the world. Nice position to be in. (JPM changed hands at $41.89 Wednesday—Editor.)

Wells Fargo [also is] reaping the rewards of keeping its powder dry. The company did add $1.5 billion in the second quarter to its provisions against bad loans, but net charge-offs climbed to just an annualized 1.55% for the quarter.

The relatively modest losses have let Wells Fargo increase its lending just as its capital-constrained competitors have pulled back. Average total loans climbed 18% from the second quarter of 2007 and at an 8% annualized rate from the first quarter of 2008.

Having the cash to lend when other banks don't has let Wells Fargo increase the already hefty difference between what it pays to raise capital and what it collects from borrowers. That difference, net interest margin, climbed to 4.92 percentage points in the second quarter, up 0.32 [points] from the first quarter of 2008. As of July 25th, the stock showed a yield of 4.67%, [and the bank raised] its quarterly dividend by 10% to 34 cents a share. (Wells was trading at $31.20 Wednesday—Editor.)

I don't think the [recent rally in financials] is sustainable, and I don't think it is based on fundamentals. I'd look for another drop in the sector before I even thought about buying.

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