Banks: Big or Small?

07/16/2014 7:00 am EST

Focus: STOCKS

Hilary Kramer

Editor, GameChanger Stocks

Many are wondering whether the big or regional banks are the best investment and Hilary Kramer shares her analysis.

SPEAKER 1:  Hi.  I’m here today with Hilary Kramer, Editor of GameChanger Stocks.com, and we’re going to talk about financials.  Now, Hilary, what’s the difference between the big banks and the regionals and why is it so hard to make money in big banks these days as an investor?

HILARY KRAMER:  Big banks have spent so much money on litigation, it can be $30 billion of their expense structure, and that’s because, of course, mortgage litigation, regulatory, and banks have a lot of trouble making money, the big ones especially, because their net interest margins are so narrow so the banks look like they might be making money because borrowing is at 0.25% from the Fed, but actually, the spread between borrowing from the Fed and lending out is just too narrow to make money.  The big banks have to make big bets and big capital expenditures to decide to move them to emerging markets, to create a presence in a country like India, China.  It might be down the road very profitable but for right now, it’s a very expense proposition.  The regional banks, on the other hand, can be the cornerstone of a community, it can be the center of consumer and commercial banking, and they can also be able to make money and make loans and actually bring in interest income from mortgages without seeing the same level of defaults.

SPEAKER 1:  Their margins are not as narrow in the regional.

HILARY KRAMER:  Their margins might be the same in terms of narrow, maybe they get an extra 50 basis points, but at the same time, their actual default ratio of bad mortgages to good mortgages tends to be better because they had to from the very beginning.  Many of those mortgages, they’ve kept in-house.  They had to make sure that they had enough equity and loan-to-value ratio was fair enough that they could do well.

SPEAKER 1:  So there’s a couple that you think people should consider.  Tell me about them and why.

HILARY KRAMER:  My favorite is People’s United, PBCT.  First of all, they have a wonderful dividend yield of 2.8%.  PBCT is located in Bridgeport, Connecticut, growing like crazy, did a great job making their own small acquisitions, but themselves will be an acquisition target because they’re just a great banking franchise, offer excellent customer service, online banking, and PBCT is growing and has entered the New York market.  Right on Park Avenue in New York City by Grand Central, you can see a People’s United Bank. 

SPEAKER 1:  Connecticut is a good market also.

HILARY KRAMER:  Absolutely, and they’ve expanded into Boston and then down to New York and Connecticut, as a base, is excellent.  Okay, now, another company I like is actually Fortegra Financial, FRF.  Fortegra is an insurance company but really, insurance brokerage, insurance brokerage such as providing warranties and guarantees for cellphone companies, auto parts.  Fortegra is a special niche in providing for credit unions, insurance that’s white labeled for the actual credit union.

SPEAKER 1:              So regional bank insurance?

HILARY KRAMER:  Exactly, exactly, and it’s a great business.  I would say Fortegra, FRF, is one of the best values in the entire stock market right now.

SPEAKER 1:  Really.

HILARY KRAMER:  Makes real money, has just increased their line of credit to $100 million with Wells Fargo.

SPEAKER 1:  Any dividend with them?

HILARY KRAMER:  There’s no dividend there but it’s a really strong company that’s been around with a lot of franchises and it has this great niche in the market.

SPEAKER 1:  Thanks, Hilary.  Thanks for joining us at Money Show.com. 

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