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NOTE: Please confirm through your own research any numbers on which you are to make a buy, sell or hold decision. The Price-to-Book calculations treats Preferred Stock as a debt and not an equity - thus those calculations will vary from most other published numbers. Monthly Sector Summary During the first two weeks of February, the year-to-date sector price gains rose from 1.52% to 3.51% and 04 EPS estimates rose to 12.63%. Yields fell from 2.89% to 2.85%. During the last two weeks of February, the year-to-date sector price gains rose from 3.51% to 4.33% and 04 EPS estimates rose from 9.85% . Yields fell from 2.85% to 2.82%. The 04 EPS estimate for UBS rose a dramatic $1.24, with smaller increases coming from JPM [6 cents], ONE [2 cents] and C and WB [a penny]. Finding Money in Banks James Glassman, Washington Post 2-01 Year in and year out, financial stocks make remarkably stable and productive investments. In fact, it's kind of a mystery. Here's just one example. John Hancock Regional Bank Fund (FRBFX) - the largest, but by no means the best-performing, financial-stock mutual fund - has returned an annual average of 14% over the past 10 years, beating the benchmark S&P 500 by a solid three percentage points with risk levels that are well below average. Over the past five years, while the market was dead flat, the Hancock fund, which owns such stalwarts as Wells Fargo (WFC), rose 46%. It has done well through thick and thin. According to the Value Line Investment Survey, diversified financial services firms have done 50 times better than the market as a whole since 1967. Conventional large banks have done six times better - which is still pretty good. You don't get returns like these unless companies both increase their profits swiftly and, for some reason, go largely unappreciated for the accomplishment. Most Wall Street analysts simply don't understand the accounting practices of banks. Their earnings can swing widely from quarter to quarter on their reserves and write-offs for bad loans, figures that are largely discretionary and difficult to predict because loan portfolios are confidential. This extra short-term risk may be the reason that banks tend to trade at low valuations. Consider Citigroup. The stock now yields 3.3% - more than a five-year Treasury note. The consensus projection is that Citigroup profit will rise at an average of 12 percent for the next five years. The stock trades at a measly price-to-earnings (P/E) ratio of 14, compared with a P/E of 30 for the stocks of the S&P 500. Another example of apparent value is MBNA. It has consistently produced returns on equity of more than 20% annually and has increased its earnings in a Beautiful Line from 18 cents to $1.79 per share over the past decade. Yet it trades at a P/E of 15 and has a dividend yield of 1.7%. Overall, this is a wonderful industry to own. Banks earned about $300 billion last year, a third of all corporate profits. Vast brainpower is being devoted to engineering new financial products, and the process of consolidation continues. Bank Update Thomas Brown, Second Curve Capital via NY Times 2-08 Bank earnings suffered in 1999, 2000 and 2001 due to high credit losses and acquisitions that had been made in the 1994 to 1998 period. Then we had a great period, beginning in 2002 and accelerating in 2003, of an earnings recovery driven by lower credit losses, improving net interest margins, the mortgage refinancing boom and the fact that the banks weren't doing stupid acquisitions. The economic fundamentals are improving, and that is by far the most important variable for the industry over all. Credit losses should continue to decline, and loan demand should be improving, along with net interest margins. There will be more mergers this year, and more ill-considered ones. P/E multiples in the banking industry have compacted, which makes it easier for the large banks to make big acquisitions than it has been over the last three years. Citigroup Buys South Korean Bank for $2.7 Billion Reuters 2-23 In the largest ever foreign investment in South Korea, Citigroup said on Monday it would buy KorAm Bank, Korea's sixth-largest bank, for $2.7 billion to extend its push into emerging markets. `There are a whole series of markets...that are now opening to foreign direct investment. What we have accomplished in Mexico with Banamex or Poland with Handlowy, we feel we can accomplish in a number of Asian countries' said Deryck Maughan, chief executive of Citigroup International. Citigroup's overseas profits rose 18% to $4.9 billion in 2003, or 27.5% of total earnings. The bank's Asia-ex Japan operations brought in $1.8 billion. KorAm has assets of 43 trillion won, 222 domestic branches, more than six million customers, 3.3 million card accounts, and a market share of 7.6 percent based on revenue. Citigroup Korea has local assets of 10.4 trillion won, revenues of 355 billion won and 12 consumer branches with 799 staff. Monthly Sector Summary During the first two weeks of February, the year-to-date sector price gains rose from 6.56% to 9.97% and 04 EPS estimates rose from 3.28% to 7.09%. During the last two weeks of February, the year-to-date sector price gains fell from 9.97% to 9.71% and 04 EPS estimates rose from 7.09% to 17.25%. All stocks in this sector [except AMTD] had 04 EPS upgrades, with TROW at 71 cents being the largest both nominally and as a percentage. Brokerage Stocks Porus Cooper, Philadelphia Inquirer 2-10 You've made some money in the stock market lately. Your discount broker has made money off you. Now, is there any money you can make off your broker? It's probably too late. The time to buy the stocks of retail brokerage companies Charles Schwab, E-Trade and Ameritrade was a year ago, according to analyst Mike Ford-Taggart at Morningstar. "Right now, my brokerage stocks are all above my fair value estimates" of their prices, Ford-Taggart said. Last year, the NYSE recorded 723 million trades, the most ever in one year, up from 546 million trades in 2002. There were 733 million trades on the Nasdaq, up from 601 million in 2002 and the highest in at least five years. For its fiscal year ended in September 2003, online broker Ameritrade reported a 70% increase in the average number of trades per day it handled - to 142,612 - as well as more trades per client and higher commissions and clearing fees per trade. To varying degrees, the brokerages have reinvented themselves in recent years. E-Trade added a unit to cater to active traders, and its online banking unit added mortgages and consumer lending. Schwab launched a bank, bought asset-management services for high-net-worth individuals, shed most of its foreign operations, and, over a two-year period, fired one-third of its employees. Schwab reported net income of $472 million for 2003, four times the $109 million it reported for 2002. E-Trade reported $203 million in net income for last year, coming back from a $186 million loss the year before. The market is "probably in a three-year up cycle that began in July 2002," said Eugene Peroni, senior managing director of equity research at Claymore Securities. Peroni, a stock-market-trend tracker, said he expects financial-company stocks to continue to remain strong for another year. Ford-Taggart, who weighs the business risks, cash-flow volatility, and competitive advantage of each company, said the stock prices of retail brokerages already have outrun the companies' long-term earnings prospects. "Everybody is all excited that Ameritrade had great earnings last quarter. It blew the estimates away," he said. "But that's great only if you are investing for next week or so. You will be disappointed if you're investing for next year." At the $1.1 billion Delaware Equity Income Fund, portfolio managers checked out, but passed on, Schwab and E-Trade. Instead, the fund is disproportionately invested in Morgan Stanley and Goldman Sachs, said Rob Arnold, senior portfolio manager. The time also is ripe for such firms as Morgan Stanley and Goldman Sachs to benefit from an expected upsurge in lucrative investment banking activities, such as initial and secondary public offerings and mergers and acquisitions. Online Brokers Update Greg Morcroft, CBS.MarketWatch 2-25 TD Waterhouse reported that its January daily average revenue trades rose 36% from December. That compares to similar gains already reported by E-Trade, Ameritrade and Charles Schwab. In a morning research report, analysts at Keefe Bruyette and Woods pointed out that while preliminary reports on February trading at the firms indicate a slowdown on a month to month basis from January, there's still more trading going on than during the last half of 2003. "Despite the declines from the exceptional levels of trading activity witnessed in January, we believe February (daily average revenue trades) are still trending above already robust (second half of 2003) levels broadly," Keefe analysts wrote.
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