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Biz Links Current Issue Q3-02 Index Q2-02 Index Q1-02 Index Q4-01 Index Q3-01 Index Q2-01 Index Q1-01 Index Prior Financial Services Updates Oct 2004 Sept 2004 August 2004 July 2004 June 2004 May 2004 Feb 2004 Jan 2004 Dec 2003 Nov 2003 Oct 2003 |
NOTE: Please confirm through your own research any numbers on which you are to make a buy, sell or hold decision. Monthly Sector Summary During January, the year-to-date sector price performance fell 2.38% gain. 05 EPS growth estimates fell 1.48%. Yields rose from 3.13% to 3.20%. Bank of America's Happy Surprise Forbes 2-07-05 It's a blustery Thursday morning, and Liam E. McGee is a man on a mission as he marches briskly into a Fleet Bank branch in Boston's historic district. McGee isn't here to cash a check. Rather, as president of Bank of America Corp.'s consumer and small-business division, he's making spot checks on some of the 1,500 branches the bank inherited when it bought FleetBoston Financial Corp. last April. Striding through an eerily long corridor that winds back to the teller windows, the 50-year-old Irishman frowns as he navigates the quirky floor plan. "Layouts like this are just one of the challenges we have," he says. Finally inside the lobby, though, McGee is pleased to see the branch manager and reps engaging customers as they enter. "If you'd visited here six months ago, you would have seen all these people hidden back in their offices," he says. So far, McGee's efforts to integrate FleetBoston's consumer businesses into Bank of America appear to be paying off -- much to the surprise of Wall Street. The markets roundly panned the $47 billion deal -- one of the largest bank mergers ever -- when it was unveiled in October, 2003. The concern was that BofA had grossly overpaid for FleetBoston, which had been notorious among customers for poor service and on Wall Street for lackluster financial performance. The deal was initially marred by a heavy exodus of Fleet executives as well as a spate of negative headlines after Boston politicos accused BofA of breaking its initial pledge that there would be no net job losses in New England as a result of the merger. But thanks in large part to McGee's sweeping makeover of Fleet's branch network, the deal is looking like a winner. After several years during which Fleet lost customers, Bank of America added 184,000 new consumer checking accounts and 196,000 savings accounts last year in Fleet's old stomping grounds. BofA achieved that growth while wringing $909 million in costs from FleetBoston, slightly more than it had projected. The result: Fourth-quarter profits at the original Bank of America and the old FleetBoston grew 12%, to $3.85 billion. Over the past year, BofA's shares have risen 16.9%, vs. a 6.3% return for the Philadelphia KBW Bank Index. The Fleet deal "has gone far better than I anticipated," says Steven Wharton, a portfolio manager at Morgan Stanley Financial Services Trust, who holds 440,200 BofA shares. The key to BofA's unexpected success with FleetBoston, say analysts, has been the efforts of McGee and his team to overhaul Fleet's branches, from products to training to culture. To lure new customers, BofA dangled free checking and free online bill-paying, a service for which many New England banks still charged. And while the old FleetBoston simply gave customers the 800 number for an outside mortgage lender, BofA has outfitted roughly two-thirds of Fleet branches with special software that approves or rejects a customer's application for a mortgage or home-equity loans within 30 minutes. At the same time, Bank of America recruited dozens of new branch managers and reps from retailers with strong service cultures, such as Target. It also adopted a few touches from Walt Disney (Employees are now "on stage" when they're meeting with customers and "off stage" when they're in a back office handling paperwork.) And he implemented an exhaustive "playbook" that has scripts for everything down to the language with which tellers are supposed to greet customers. Still, at one Boston branch McGee visited, Paul J. Hillson, a consumer marketing manager, concedes that he encountered initial resistance from some FleetBoston tellers: "What you hear is, 'But I already know that customer."' McGee agrees that changing employee behavior "is still a work in progress." Measuring each branch's performance and giving employees feedback are critical parts of the makeover. BofA brought in Six Sigma specialists to develop systems to generate reports on everything from customer satisfaction to sales productivity at each branch so that district managers can quickly intervene at underperforming offices. Already, each Fleet branch employee is signing up customers each day for an average of 4.1 new products, such as savings accounts and credit cards. That figure has more than doubled since the merger, from 1.9, and McGee expects it to hit 6.4 this year. To prevent branch employees from indiscriminately flogging new products, BofA redesigned its pay plan to rescind bonuses paid for sales of any products that customers cancel within four months. "I don't want our associates just pounding product that customers really don't need," says McGee. McGee isn't out of the woods yet with FleetBoston. The biggest test comes this summer, when BofA switches Fleet's branches over to its own software platform -- a process that, more than anything else, can lead to the service glitches that trigger customer defections. And some rivals contend that any gains BofA is making on the retail side are being partially offset by the defections of Fleet's old commercial-lending officers to other banks. McGee acknowledges some loss of lending officers, but he denies that it has resulted in "anything close to a material nature" in lost loan volume. If that's the strongest criticism competitors can level, McGee has more than the luck of the Irish going for him. Bank of America CEO Downplays Big Growth Targets Jonathan Stempel, Reuters 1-26-05 Bank of America Corp.'s chief executive on Wednesday played down expectations the No. 3 U.S. bank might soon seek to expand aggressively by making a big acquisition or pushing to loosen U.S. limits on deposits. Chief Executive Kenneth Lewis told a Smith Barney financial services conference he sees "no strategic need" to be the aggressive acquirer that his predecessor, Hugh McColl, was at NationsBank, which merged with BankAmerica in 1998 to form Bank of America. Lewis was particularly cautious addressing speculation the Charlotte, North Carolina-based bank might seek to acquire either an investment bank or a bank outside the United States, saying he likes the company's business model. "I would worry about the Bank of America culture changing in a way that I would not like" if Bank of America bought an investment banking rival, Lewis said. Bank of America's $48 billion purchase last April of FleetBoston Financial Corp. pushed it against the 10 percent federal limit on deposits. That stoked speculation Lewis might seek to overturn the limit or grow another big merger. Lewis suggested he is unlikely to pursue these options soon. Bank of America recently set plans to invest $675 million to expand its own investment bank, which for several years has ranked roughly 10th in size and disclosed fees. "With this additional investment, we can maintain our culture, (and) keep the levels of profitability we have," he said. Lewis, 57, has worked for Bank of America or its predecessors since 1969. The bank last year reported a profit of $14.1 billion on revenue of $49.6 billion. Lewis contrasted non-U.S. bank acquisitions with acquisitions such as Fleet. He said he made U.S. purchases "with laws that we understood, cultures we understood, (and) languages that we mostly understood, and all of those things would change if we go offshore.... You never say never, but the degree of difficulty and the bar gets raised significantly when you think about doing things outside the country on that kind of scale." Lewis said he wasn't likely to push Congress to change existing deposit limits, such as by including deposits held by credit unions in the overall tally, "We are not actively pursuing that," he said. "I think American people don't like huge concentrations of power, particularly in financial services companies. I think that would be a tough one to get changed because of that." Bank of America Reports Record 2004 Earnings of $3.69 Per Share PRNewswire 1-19-05 Bank of America Corporation today reported that fourth quarter net income rose 41 percent to $3.85 billion, or $.94 per share (diluted), from $2.73 billion, or $.92 per share, a year ago. Under purchase accounting rules, results reported for periods in 2003 and the first quarter of 2004 do not include the impact of FleetBoston Financial Corporation, which was acquired on April 1, 2004. Return on common equity in the fourth quarter was 15.63 percent. For the full year, net income increased 31 percent to $14.1 billion, or $3.69 per share (diluted) from $10.8 billion, or $3.57 per share in 2003. In addition to the impact of Fleet, the fourth quarter increase resulted from improving performance in all major business lines driven by the continued success in attracting, retaining and expanding customer relationships. Consumer accounts, deposit and card balances, credit and debit card purchase transaction volumes, trading, investment banking and assets under management all registered growth from the third quarter and the prior year. The integration of Fleet remained on schedule as the major rebranding effort across the franchise was completed, systems conversions began and customer satisfaction and accounts continued to rise. Fourth quarter earnings included merger and restructuring charges of $181 million after-tax, which reduced earnings by 4 cents per share. "We are pleased with the year's successes and our position entering 2005," said Kenneth D. Lewis, president and chief executive officer. "We began 2004 with the objective of achieving a seamless integration of Fleet while not interrupting our momentum in the legacy Bank of America franchise. The Fleet transition is not only on schedule, but we have increased customer satisfaction during the year, hit or exceeded our customer account growth and profitability targets and achieved promised cost savings." "While 2005 presents such challenges as a flattening yield curve and continued systems conversions in the Northeast, I couldn't be more satisfied with where Bank of America stands in meeting those challenges," said Lewis. Business Highlights: {1} The company grew net new consumer checking accounts by 2.11 million in 2004, compared to an increase of 1.25 million in 2003. The number of accounts increased by 596,000 in the fourth quarter. {2} The company grew net new consumer savings products by 2.60 million in 2004, compared to an increase of 640,000 in 2003. The number of new savings products was 729,000 in the fourth quarter. {3} The company opened 5.59 million new consumer credit card accounts in 2004, compared to 4.28 million in 2003. The number of new consumer credit card accounts opened in the fourth quarter was 1.53 million. {4} Online banking active users increased 72 percent to 12.4 million, representing a 50 percent penetration of checking account customers. Of those users, 5.8 million use bill pay, an increase of 78 percent from a year ago. {5} For the year, both syndicated loans and leveraged loans were first in market share in the number of deals closed and were both second in the market for the dollar volume of deals closed. {6} In 2004, the company became the top U.S. deal manager in commercial mortgage-backed securities, issuing $11.8 billion in securities. Revenue on a fully taxable-equivalent basis grew to $13.9 billion from $9.79 billion the previous year. Net interest income on a fully taxable-equivalent basis was $7.96 billion compared to $5.75 billion a year earlier. In addition to the impact of Fleet, the increase was driven by the results of asset-liability management activities, consumer and middle-market commercial loan growth and domestic deposit growth. These increases were partially offset by the impact of lower trading-related contributions and large-corporate and foreign loan balances. Noninterest income was $5.96 billion compared to $4.05 billion a year earlier. Consumer and Small Business Banking earnings increased 15 percent in 2004 to $6.55 billion. Revenue of $26.9 billion was up 28 percent. Commercial Banking earnings increased 93 percent to $2.83 million as revenue rose 49 percent to $6.72 billion. Global Corporate and Investment Banking earnings rose 9 percent to $1.95 billion as revenue increased 9 percent to $9.05 billion. Wealth and Investment Management earnings grew 28 percent to $1.58 billion. Revenue rose 47 percent to $5.92 billion. Corporate Other earned $1.23 billion for the year, compared to $605 million in 2003. Principal Investing earned $166 million in 2004. Latin America earned $310 million during the year. Bank of New York Falls on Lowered 2005 Profit View Jonathan Stempel, Reuters 1-26-05 Bank of New York shares on Wednesday fell 2.9 percent, and briefly touched a four-month low, after the bank said it expects 2005 earnings to miss analysts' average forecasts, citing higher costs. The No. 10 U.S. bank said in its annual analyst presentation on Tuesday it expects 2005 profit of $2.01 to $2.06 per share, below the average forecast of $2.10 from analysts polled by Reuters Estimates. Chief executive Thomas Renyi said he expects the bank in 2005 to face "upward pressure" on such expenses as employee benefits, and compliance and legal costs. "Our most important priority is managing costs lower," Renyi said. The bank, which generates much of its business from securities processing rather than branch banking, expects revenue to rise 8 percent to 9 percent in 2005, and expenses to increase 8 percent to 10 percent. "Going into analyst day, there was a general sense they might be more forthcoming with articulating positive operating leverage in 2005," said Jacqueline Reeves, an analyst with Ryan Beck & Co. "That's now clearly a 2006 story." She rates the bank's shares "outperform." Bank of New York shares have fallen 10 percent since the bank on Jan. 19 said fourth-quarter profit rose 14 percent to $351 million, or 45 cents per share, but said expenses rose 8 percent and expressed concern about more increases. Analysts previously thought the bank would earn $2.13 per share in 2005. The share price decline has wiped out $2.6 billion of market value based on reported shares outstanding. Bank of New York Reports Q4 EPS of 45 Cents, up 13% over Last Year Business Wire 1-19-05 The Bank of New York reports Q4 net income of $351 million and diluted earnings per share of 45 cents, compared with net income of $354 million and diluted earnings per share of 46 cents in the third quarter of 2004, and net income of $307 million and diluted earnings per share of 40 cents in the fourth quarter of 2003. Full year net income for 2004 was $1,440 million, or $1.85 diluted earnings per share, compared to $1,157 million, or $1.52 diluted earnings per share in 2003. A charge related to a reserve for the cost of the anticipated settlement of the RW Professional Leasing Services Corp. matter ("RW Matter"), as well as certain items detailed in "Other Fourth Quarter Developments" reduced EPS by 3 cents for the fourth quarter and full year 2004. Fourth quarter and full year 2003 results included merger and integration costs associated with the Pershing acquisition of 4 cents and 8 cents per share while the full year also included 7 cents per share related to the GMAC settlement. Fourth quarter highlights include strong performance in securities servicing fees and foreign exchange and other trading revenues. Securities servicing fees increased 8% sequentially in the fourth quarter to $742 million, reflecting more active equity markets and the conversion of new business wins. Execution and clearing services revenues increased 15% sequentially, reflecting a strong rebound in equity market volumes from the weak third quarter. Issuer services fees increased 6% relative to the third quarter to $149 million, reflecting strong results in depositary receipts, and modest growth in corporate trust. Investor services fees were up 5% sequentially, reflecting higher global funds services fees driven by new business wins. Foreign exchange and other trading revenues increased 34% sequentially, reflecting higher levels of client activity and an increase in volatility. For the full year, the growth in earnings was paced by securities servicing growth of 19% (8% adjusted for full year impact of Pershing), core net interest income growth of 6%, strong credit performance, and higher than expected securities gains. Performance was strong across nearly all the Company's securities servicing businesses. Both investor and issuer services increased by 11%. The growth in investor services was driven largely by new business wins and improvements year-over-year in asset values and volumes. Issuer services benefited from increased cross-border activity in depositary receipts and improving market share in global products within corporate trust. Broker-dealer services was up 19% primarily due to strong growth in collateral management. In addition, private client services and asset management fees were up 17%, primarily due to exceptional growth at the Company fund of funds manager, Ivy Asset Management ("Ivy"). This strength in revenue was partially offset by upward pressure on the Company's expense base. Higher option and pension expenses, business continuity spending, costs associated with legal and regulatory matters, and costs associated with converting new business opportunities in investor services all contributed to higher expense levels. Chairman and Chief Executive Officer Thomas A. Renyi stated, "Our securities servicing and fiduciary businesses responded well to the better market environment this quarter, which improved considerably following the November elections. In particular, our equity-linked and foreign exchange businesses benefited from a significant rebound in market volumes and increased cross-border flows and volatility. Net interest income continues to benefit from a well positioned balance sheet and the credit environment remains highly favorable. "We did experience a noticeable uptick in expenses as we recognized costs associated with the conversion of new outsourcing wins, hiring of customer service personnel in some of our faster growing businesses, higher incentive compensation in light of the sharp rebound in performance in the last two months of the quarter as well as continuing high costs associated with responding to regulatory inquiries. "On balance, I am quite encouraged by our top line growth this quarter which gives evidence to the positive effect an improving investment environment has on our business model. We look forward to 2005 which should offer a stronger operating environment and the revenue momentum it brings along. Our challenge in the new year is to contain the more significant cost pressures we face in order to bring more of our revenue growth to the bottom line." Total noninterest income for the fourth quarter of 2004 was $1,186 million, an increase of 7% sequentially and 8% from a year ago. Net interest income on a taxable equivalent basis was $536 million in the fourth quarter of 2004, which reflects a net interest rate spread of 2.26% and a net yield on interest earning assets of 2.64%. JPMorgan Chase Reports 2004 Fourth Quarter Net Income of $1.7 Billion Business Wire 1-19-05 JPMorgan Chase reported 2004 fourth quarter net income of $1.7 billion, or $0.46 per share, compared to net income of $1.9 billion, or $0.89 per share, for the fourth quarter of 2003. Current period results include $650 million in after-tax charges, or $0.18 per share, comprised of merger costs of $324 million and charges of $326 million to conform accounting policies, reflecting the merger with Bank One Corporation ("the Merger") completed on July 1, 2004. Excluding these charges, operating earnings would have been $2.3 billion, or $0.64 per share. Prior year reported results do not include Bank One. Refer to the "Merger and other financial information" section of this press release for additional information concerning the Merger. William B. Harrison, Jr., Chairman and Chief Executive Officer commented, "Operating results for the fourth quarter improved from the third quarter, but still reflected mixed performance. The Investment Bank generated strong investment banking fees and saw a moderate improvement in trading results. Card Services and Asset & Wealth Management generated double-digit earnings growth, and Private Equity gains were strong. In Retail Financial Services the branch business continued to experience good annual growth in accounts and deposits, which was more than offset by a decline in the prime production and servicing business of Home Finance." James Dimon, President and Chief Operating Officer commenting on merger integration said, "Merger integration continues to progress well and we are on track to achieve the $3 billion of estimated annual cost saves; headcount was reduced by over six thousand since year-end 2003, conversion of Bank One's credit card portfolio was completed, other systems conversions are on schedule and the firm is prepared for large scale conversions in 2005 and 2006. We have essentially completed the strategic review of all of our businesses. We sold our $4 billion manufactured home loan portfolio, substantially reduced our auto lease originations, sold the majority of our third party private equity investments and subsequent to year-end sold our $2 billion recreational vehicle portfolio." Operating earnings were $660 million, down 18% from the prior year. Results were positively affected by the Merger, offset by higher levels of compensation expense and reduced benefit from credit costs. Revenues of $3.2 billion were up 10%. Investment banking fees of $1.1 billion increased 29%, reflecting continued strong levels of underwriting and advisory fees. Fixed Income Markets revenues of $1.5 billion were up 11% and rebounded from disappointing third quarter results. Equity Markets revenues of $243 million were down 24% due to reduced portfolio management trading results. Credit Portfolio revenues of $348 million were down 4%, reflecting lower revenues from tightening spreads, partially offset by the Merger. Expenses of $2.4 billion were up 33% due to increased compensation costs and the Merger. Total revenue increased to $3.5 billion, up from $1.7 billion. Net interest income of $2.7 billion increased from $1.3 billion, benefiting from the Merger, wider spreads on deposit products, and growth in retained loan and core deposit balances. Noninterest revenue of $893 million increased from $388 million due to the Merger and higher deposit-related fees. Both components of total revenue included losses of $187 million associated with hedging the MSR asset (including the security losses noted above), declines related to lower prime mortgage originations, and the transfer of loans to held-for-sale. Consumer & Small Business operating earnings totaled $430 million, up from $12 million last year. While growth largely reflected the Merger, the business also benefited from deposit growth and wider spreads. Auto & Education Finance operating earnings were $84 million, up from $53 million last year primarily due to the Merger. Total revenue of $364 million included a $25 million charge to cover higher than expected lease residual losses. Results also benefited from a $35 million release of allowance for loan losses reflecting favorable credit trends in the auto loan portfolio. Insurance operating earnings totaled $22 million on net revenues of $173 million. The increase over the prior year was almost entirely due to the Merger. Wachovia's 4th Quarter 2004 Earnings Per Share Up 14% to 95 Cents PRNewswire 1-19-05 Wachovia reported record fourth quarter 2004 net income of $1.45 billion, or 95 cents per share, compared with $1.10 billion, or 83 cents per share, in the fourth quarter of 2003. Excluding after-tax net merger-related expenses and other items of 4 cents per share in the fourth quarter of 2004 and 5 cents per share in the fourth quarter of 2003, fourth quarter 2004 earnings were $1.50 billion, or 99 cents per share, compared with $1.18 billion, or 88 cents per share, in the fourth quarter of 2003. Full year 2004 net income available to common stockholders was a record $5.21 billion, up 22 percent from full year 2003, and earnings per share of a record $3.81 were up 20 percent from 2003. Excluding after-tax net merger- related expenses and other items of 14 cents per share in 2004 and 18 cents in 2003, earnings available to common stockholders were $5.42 billion, or $3.95 per share, compared with $4.51 billion, or $3.36 per share, in 2003. "With three consecutive years of double-digit earnings growth, Wachovia begins 2005 with good momentum," said Ken Thompson, Wachovia chairman and chief executive officer. "All of our four major businesses set earnings and revenue records in 2004. This performance reflects our entire team's extraordinary efforts to work together in the best interests of our customers and shareholders. Performance highlights included strong balance sheet growth in the General Bank and Wealth Management, market share gains in the Corporate and Investment Bank, and sales force and efficiency improvements in Capital Management despite a challenging year in the retail brokerage industry. "The year's results show the strength of our diversified business model, and we are optimistic that our revenue strategies and expense initiatives will continue to build momentum and place us firmly on a growth path. We believe we are in a strong position for the future, with the integration of our nationwide retail brokerage business largely complete, and many opportunities ahead to deliver more products and services to customers now that SouthTrust and Wachovia have joined forces." Wells Fargo Reports Record Annual and Quarterly EPS Business Wire 1-18-05 Wells Fargo reported record diluted earnings per common share (EPS) of $4.09 for 2004, compared with $3.65 in 2003, up 12 percent. Net income was a record $7.0 billion, up 13 percent from $6.2 billion in 2003. For fourth quarter 2004, net income was a record $1.8 billion, or $1.04 per share, compared with $1.6 billion, or $.95 per share, for fourth quarter 2003, an increase in earnings per share of 10 percent. "This was another exceptional year for our company, among the very best not just in financial services but in any industry, with record diluted earnings per share of $4.09, record net income of $7.0 billion and solid market share growth across our more than 80 businesses," said Chairman and CEO Dick Kovacevich. "Because these results would not have been possible without the customer focus and dedication of our exceptional team, today we're announcing a special contribution of Wells Fargo common stock to the 401(k) Plan for eligible team members, equaling one percent of a team member's pay, up to a maximum contribution of $750, totaling $44 million. "Combined revenue in all of our businesses other than Wells Fargo Home Mortgage (Home Mortgage), which had extraordinary revenue in 2003 due to the refinance boom, grew 11 percent this year -- 6 percent including Home Mortgage. In addition to double-digit growth in EPS, we also had double-digit growth in loans and retail core deposits and continued strong credit quality for the year. Even more remarkable, our company has been achieving outstanding results not just for one, two or even five years, as many admired companies have done, but for the past 20 years, through many different economic cycles. In fact, due to our consistent vision, strong culture and time-tested business model, our annual compound growth over the past 20 years has averaged 13 percent in revenue and averaged 14 percent in diluted EPS, and our total annual compound stockholder return has been 23 percent compared with 13 percent for the S&P 500. Our total annual stockholder return has been about 10 percentage points above the S&P 500 for each of the past five, ten, 15 and 20 year periods. We have a 20-year history of investing in our company, and 2004 was one of our highest investment years ever. You must reinvest to consistently grow profit and revenue at double-digit rates for 20 years. We achieved record results while making very significant investments throughout the year to benefit the future, including opening 177 new stores, increasing the number of team members serving our customers by over 5,000, adding Wells Fargo stock to every eligible team member's 401(k) account to thank them for all their efforts, making significant incremental investments in electronic imaging, call centers and other technology projects, integrating acquisitions, and improving future margins by incurring the costs of extinguishing high interest rate debt and selling low interest rate assets. We continued to support our communities by taking a $217 million charitable contribution expense in the fourth quarter, to be funded by tax-advantaged venture capital gains, helping ensure that our Foundation remains well funded for eight to ten years. "In 2004, we became one of the nation's 20 largest mutual fund companies with the acquisition of $29 billion in assets under management from Strong Financial Corporation (Strong Financial). Our stock hit a record high close of $63.25 last month. Our solid financial performance enables us to be one of the top givers to non-profits among all U.S. companies. We continue to be the only 'Aaa' rated bank in the U.S., the highest possible credit rating. We begin 2005 with good earnings momentum in our major businesses." Revenue of $8.2 billion for fourth quarter 2004 grew $723 million, or 10 percent, from a year ago. Full-year 2004 revenue of $30 billion -- a new record -- grew 6 percent from 2003 despite a 37 percent decrease in mortgage originations as the refinance driven market declined from its exceptional 2003 level. Average core deposits of $230.2 billion for fourth quarter 2004 grew $20.2 billion, or 10 percent, from fourth quarter 2003, and increased $5.2 billion, or 9 percent (annualized), on a linked-quarter basis. Net interest income for fourth quarter 2004 increased 10 percent from a year ago. Earning assets for the fourth quarter were up 12 percent from a year ago due to the 19 percent growth in average loans. On a linked-quarter basis, net interest income was up $38 million, or 3 percent (annualized), driven by a 4 percent (annualized) increase in earning assets. Noninterest income increased $311 million, or 9 percent, from fourth quarter 2003. "The increase in fee income was driven by growth across our businesses, with particular strength in consumer loans, trust and investments, credit and debit cards, mortgage banking, equity investments and trading activities on behalf of our customers," said Atkins. Wachovia Unveils Up to 4,000 Job Cuts While Posting 32% Rise in Q4 Profit Paul Nowell, AP 1-19-05 The financial services giant Wachovia Corp. posted a 32 percent rise in fourth-quarter earnings Wednesday even as it said it plans to eliminate up to 4,000 jobs -- about 4 percent of its work force -- by 2007. Following a November merger with SouthTrust Corp., the Charlotte-based bank has about 96,000 workers. Company spokeswoman Christy Phillips said about 20 percent of the reductions will be accomplished through attrition, the rest by layoffs. The job cuts are part of a plan Wachovia executives outlined Wednesday to trim annual expenses by $400 million to $500 million. Wachovia said fourth-quarter earnings set a record last year, fueled by gains in the general bank and wealth management businesses along with a boost from the SouthTrust merger that closed Nov. 1. Wachovia's profit was $1.45 billion, or 95 cents per share, for the October-December period, up from $1.1 billion, or 83 cents per share, a year earlier. Excluding merger-related and other nonrecurring expenses, Wachovia earned $1.5 billion, or 99 cents per share, in the quarter. Those results beat Wall Street's projection by a penny a share, based on a survey of analysts by the research firm Thomson First Call. On a conference call with analysts, Wachovia chief financial officer Bob Kelly said the bank expects its job cuts to total from 3,500 to 4,000 positions through 2007 as part of a companywide efficiency program. And chief executive officer Ken Thompson vowed that the company's strong results would not get in the way of ongoing efforts to cut costs. "We've been working on our efficiency plan for nine months," he told analysts. "We expect to be able to grow revenue and keep our customers and do it efficiently at the same time." Thompson said his top managers are directly involved in the process. "This is exactly the right time to do it," he said. "This is not a one-time cost cutting exercise." Asked about additional acquisitions, Thompson left the door open but declined to elaborate. "This company has the capability to do all these things and expand through acquisitions if we find one that meets our financial parameters," he said. In the fourth quarter, revenue climbed 11 percent to $6.16 billion, up from $5.56 billion a year ago. Wachovia said its general bank produced quarterly segment earnings of $868 million, up 54 percent from the year-ago period. The wealth management segment's revenue rose 10 percent to $54 million, up 32 percent over the same quarter last year. Net interest income rose 23 percent, the bank said, on average loan growth of 24 percent in consumer and commercial lending. For the year, Wachovia's net earnings were $5.21 billion, or $3.81 per share, up from $4.26 billion, or $3.18 per share, a year ago. "With three consecutive years of double-digit earnings growth, Wachovia begins 2005 with good momentum," said Thompson. "All of our four major businesses set earnings and revenue records in 2004." In advance of the earnings report and job cuts announcement, the Charlotte Observer reported Wednesday that it obtained an internal e-mail that indicates Wachovia is seeking to move some technology operations offshore as part of the bank's efficiency push. The financial services industry has been a leader in outsourcing technology jobs overseas to save on wages. Bank of America Corp., also is based in Charlotte, has said it may hire up to 1,500 people at a subsidiary it set up last year in India. According to the e-mail sent earlier this month to employees and other executives by Martin Davis, Wachovia's corporate chief information officer, the newspaper said the company is seeking $300 million in savings over three years from its technology operations. Davis said in the e-mail that the bank has partnered with Gartner Inc., an information technology research firm, to "assist us with a framework to decision outsourcing and offshoring opportunities" of certain functions. The Wachovia spokeswoman Phillips said the e-mail was an example of how the company was trying to be up front with employees about the efficiency program. "For some time we have been saying we are going to slow expense growth by up to $1 billion," she said. "This e-mail is targeted at making sure we are communicating openly and honestly with our employees." Expect a Big Year From U.S. Bancorp Jim Jubak, MSN Money 1-19-05 A funny thing happened to financial stocks in 2004: The Federal Reserve boosted interest rates, but stocks didn't plummet. In fact, the financial sector had a pretty good year even as the Fed raised its target for short-term interest rates from 1% to 2.25%. There's a lesson for investors here: The spread between the interest rates banks pay for capital and the interest rates they charge to lend capital matters more than the absolute level or direction of interest rates. That explains the gains financial stocks posted and convinces me that Bank of America , U.S. Bancorp, Main Street Banks , Capital One Financial and MBNA will deliver above-market returns for 2005. I'll return to the future of those five stocks in a moment, but first let's take a closer look at how some big financials did last year. Pockets of Outperformance At first glance, the year was solid but not spectacular for investor favorites in the sector. Citigroup was up 3%, Washington Mutual rose 10% and Bank of America gained 18%. But there were pockets of huge outperformance: Credit card companies Capital One Financial and MBNA returned 44% and 37%, respectively; regional banks Main Street Banks and Commerce Bancorp returned 34% and 24%, respectively; and perhaps most surprisingly, some thrifts that depend on mortgage lending soared, including Golden West Financial, which returned 44% for the year. These returns weren't evenly distributed over the year, however. If you break down the performance for Citigroup, for example, you'll see the stock climbing to a high on April 1, then sinking to a low on Oct. 22 before climbing again. Washington Mutual shows a roughly similar pattern with a high on March 1, a low for the year on Aug. 12, and a retest of that low on Oct. 20. From the high to the October low, Citigroup lost 17% and Washington Mutual dropped 15%. But from the October low to the Dec. 31 close, the stocks gained 14% and 13%, respectively. The charts of the big gainers for 2004 that I mentioned above show a similar pattern but with an earlier low for the year -- May 10 for BofA, Golden West Financial and Main Street Banks -- and a longer and stronger run to the end of the year. Stocks like these simply never looked back. That pattern is pretty easy to understand -- with the benefit of hindsight, of course. The drop to the lows of March, April or May was a result of anticipation that the Fed was about to raise interest rates, as the central bank did on June 30 when it took its target short-term interest rate up to 1.25% from 1%. The months of stagnation that followed for Citigroup and Washington Mutual were the result of worries that the Fed would raise rates more quickly than it ultimately did. And the gains from May or October came as investors realized that Alan Greenspan & Co. were indeed serious when they said that rate increases would be measured. The consensus came to realize that financial stocks didn't face the kind of interest-rate spike that has devastated the sector in the past. A Not-Too-Shabby Spread Rapidly rising interest rates can cause serious trouble for banks. The biggest problem occurs when the value of a bank's interest-rate-sensitive assets -- mortgages and bonds -- drops. Second, profits can quickly disappear when the difference between the short-term interest rates banks pay for money and the long-term interest rates banks charge to lend money, known as the spread, contracts. But, remarkably in 2004, with the Fed raising short-term rates to 2.25% from 1%, neither problem surfaced. The yield on a long-term 10-year Treasury note was about 4.25% at the beginning of 2004, and it finished the year at 4.25%. The long-term assets in bank portfolios didn't plunge in value overnight. And while interest-rate spreads narrowed, they didn't collapse. The average historical gap between short-term interest rates and the yield on the 10-year Treasury is about 1.1 percentage points. Before the Fed began to raise rates, the gap had climbed to more than 3 percentage points. Borrowing money at short-term rates, as banks do in the commercial-paper market, and then lending long (or buying Treasury notes) produced easy profits. No one expected that to last forever, of course, and the fear among investors was that the smooth ride would come to a screeching halt. Instead, the spread remained far wider than the historical average. At the moment, the spread remains a very comfortable 2 percentage points. It's not as profitable as a 3-percentage-point spread, certainly, but none too shabby, either. Even that kind of relatively benign interest-rate environment wasn't without its challenges, and not every company was equally well positioned to meet those challenges. A number of banks and thrifts -- Washington Mutual, for example -- had developed a business model that was so leveraged to interest rates that it couldn't escape the year without some damage. An aggressive acquisitions strategy had turned Washington Mutual into a mortgage-lending machine that was heavily dependent on generating a very high volume of new mortgages. It took only a very slight cooling off in mortgage originations and refinancings to force Washington Mutual to sell some of its home-lending centers to American Home Mortgage in an effort to cut expenses. The company missed Wall Street's earnings estimates when it reported second-quarter earnings, as net income from its home-mortgage business went to zero from $611 million in the second quarter of 2003. That startling decline came about because in 2003, Washington Mutual had been able to make a profit by selling packages of mortgages that it had originated for a higher price, thanks to falling interest rates. With rates moving up, those gains disappeared. What It Took to Win in 2004 Bank and thrift stocks that performed the best in 2004 shared similar traits: In general, they were more conservatively run, they watched expenses, they weeded out credit risks, they built sizable consumer deposits that provided a cheaper source of capital and high-fee income, and they ran flexible consumer credit card businesses that allowed them to increase rates ahead of any interest-rate hike from the Fed. For example, Bank of America leapt ahead of the competition in the race to become the first truly national consumer-banking franchise when it bought FleetBoston. With banks and ATMs in 21 states, the company became a deposit-gathering machine. On the cost front, the bank aimed to generate $250 million in cost savings in 2004, and a total of $1.5 billion by the end of 2005. U.S. Bancorp has turned into a specialist in generating fee-based business from its customers as it has rapidly expanded into lines such as asset management (through the 2002 acquisition of the corporate trust business of State Street ). About 40% of revenue comes from fee-based businesses. Capital One Financial trimmed its credit card loan delinquencies, which in turn reduced the amount of money it set aside for loan losses. That unencumbered cash eventually showed up as increased earnings. That improvement in credit quality has come even as the company has continued to build its share of the market for Visa and MasterCard credit cards. MBNA was able to improve an already strong credit quality. And, of course, as is the case with Capital One as well, credit card companies are easily able to keep the rates they charge to card holders well ahead of any increases in short-term interest rates. And finally Main Street Banks, a stock that I added to Jubak's Picks on Sept. 10, is a prime example of a local bank that has built a consumer deposit and business-lending franchise in a targeted geographic market. That specialization gives the bank access to the best of the trends I've mentioned here: consumer deposits, high fee-based income, an ability to keep a close eye on costs and a loyal customer loan base with high credit quality. U.S. Bancorp Stands Out for 2005 This year isn't going to be a complete replay of 2004, of course. For instance, some regions of the country, New York and Texas to take two examples, engaged in a virtual orgy of branch-bank openings in 2004. We're likely to see a contraction first in profitability at those branches, and then in the number of bricks-and-mortar branches themselves. Commerce Bank is a master at opening profitable branches, but I'm going to give the shares a pass in 2005 until some of their less-adept competitors go through their branch shakeout. Thrifts like Golden West Financial and Doral Financial are just too expensive for me right now, even though I think Golden West is the best in the adjustable-rate mortgage business. The odds are that some competitor, probably in the sub-prime sector that specializes in mortgages for customers with less-than-ideal credit ratings, will blow up in 2005. That's when I'd like to buy Golden West. With this column, though, I am going to add U.S. Bancorp to my Jubak's Picks portfolio. I think this bank is well-positioned to be a winner again in 2005. And in this stock market, I certainly don't mind that the shares pay a 4% dividend, either. Changes to Jubak's Picks Buy U.S. Bancorp. I'm adding U.S. Bancorp to Jubak's Picks for what it is and for what it isn't. On the "is" side of the ledger, this bank has become a specialist in generating fee-based business. As I mentioned earlier, about 40% of revenue comes from that source. That business has been growing nicely, accounting for much of the 9% earnings growth year to year, although that growth has been obscured by losses on the bank's investment portfolio and problems in its commercial loan portfolio. Now that those losses and problems seem to be behind the bank -- nonperforming commercial loans were down 50% in June from the level in June 2003 -- I think earnings growth will kick up above 10% for 2005. Investors can also count on a 4% dividend and the likelihood of future dividend increases like the 25% hike that company's board voted in December 2004. On the "isn't" side of the ledger, the bank doesn't have much exposure to the risks of the home mortgage business: About 10% of the company's non-interest income comes from mortgages. And with the spinoff of investment house Piper Jaffray in 2003 and the acquisition of the corporate trust business of State Street in December 2002, U.S. Bancorp also lowered its business risk. As of Jan. 18, I'm adding shares of U.S. Bancorp to Jubak's Picks with a December 2005 target price of $36. January ratings Changes On 31-Jan-05 Piper Jaffray Upgrade BAC from Market Perform to Outperform. Month Ending Mid-Cap Bank Sector Summary During January, the year-to-date sector prices fell 7.27%. 04 EPS growth estimates fell 2.11%. Yields went from 3.41% to 3.67% - a rise of 26 basis points. Home Page Factoids Previous Update
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