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Banks Dangle High Teaser Rates Jane Kim, WSJ 02-01 Banks are aggressively courting new deposits with introductory rates that could be among the highest that consumers will see for some time. Many of the banks' new teaser rates are being offered by online banks, which are able to offer higher rates because they don't have the fixed expenses of maintaining networks of branches. ING Direct is offering 4.75% on new deposits for its savings accounts until April 15, up from 3.8%. Traditional brick-and-mortar banks also are introducing special deals. For customers who bring in new deposits and open up a checking account, Citibank is promoting a 4.25% rate on a six-month certificate of deposit, exceeding even the bank's long-term rates on one-year and three-year CDs. And M&T Bank last month launched a three-month promotional rate of 4% for customers who open a money-market account with at least $10,000. Tantalizing rate offers have long been one of the most reliable asset-gathering mechanisms for financial institutions and some banks are now raising their rates to combat a slowdown in deposit growth. Bank deposits at federally insured institutions grew 7.8% on an annualized basis to $6.06 trillion through Q4-04, compared with 10.6% growth for all of 2004, according to SNL Financial. In the current year, deposit growth is expected to slow to a mid-single-digit pace, analysts say. The reasons: A slowdown in the nation's housing markets has left consumers with less cash than they previously had available through mortgage refinancings and home-equity loans. What's more, higher-yielding alternatives such as money-market mutual funds are taking a bigger share of consumers' cash. Two of these funds, Fidelity Cash Reserves and Vanguard's Prime Money Market, have yields that recently surpassed 4%, catching up with top-yielding savings accounts. While the heightened competition is creating attractive short-term deals, consumers need to pay close attention to what rate they end up with, and what kind of account their money goes to, after the promotional period ends. Some promotions have low or no minimum deposits. But when the introductory period ends, the size of the balance can have a dramatic effect on the new yield. This is the case at E*Trade, where new customers who open a money-market account earn 4.1% for 90 days. After that time, if rates remain at today's levels, a customer with more than $50,000 in the account would see that rate drop to 3.4%, while someone with a smaller balance might get just 2.6%. The heavy promotions and higher rates by Internet banks, including ING Direct and EmigrantDirect, have been putting pressure on traditional banks to raise their own rates by creating for consumers the "appearance" of a high-rate environment, says Dave Kaytes, managing director of Novantas LLC. HSBCDirect this week rolled out a promotional rate paying 4.8% on its savings accounts until April 30, after which the yield drops to the regular rate, currently 4.25%. Mr. Kaytes expects more banks this year will begin offering introductory rates that are roughly 1% to 2% above market rates. Restrictions abound on the recent offers. The fine print behind some promotional rates may require that consumers bring over a sizable amount of cash or open up other accounts at the bank in order to qualify for the teaser rate, or to maintain a higher rate once the promotional period ends. Citibank is currently offering a money-market account paying 3.8% for consumers who have at least $50,000 in assets or loans throughout the bank. Customers at National City, which is offering 4.5% on its money-market account for 180 days, will need to open up a checking account and bring at least $35,000 in total balances in order to qualify for the bank's "relationship" money-market account, which pays higher rates than its standard money-market account, once the introductory period expires. To be sure, watchful consumers can always move their cash into better-paying accounts once the introductory period expires, since many of the promotional rates are being offered on accounts that are liquid, or easily moved. And some investors may want to invest in shorter-term CDs so they don't lose out on higher rates that may become available if the Fed boosts the target short-term rate at its next meeting, in March. However, "banks are banking on the customer opening up the account and forgetting that it will expire," says Randy Rosen, manager of deposit research for Informa Research Services Inc. Since the Fed began raising rates in 2004, interest-bearing instruments have correspondingly moved higher. The average rates on six-month and one-year CDs, for example, have climbed to 2.86% and 3.34%, respectively, from 1.08% and 1.51% in June 2004, according to Bankrate.com. Investors can also turn to their local community banks, which are rolling out promotions geared toward new money. In December, Old Second Bancorp introduced a six-month CD that pays 4.58% for customers bringing new deposits of at least $5,000, with a guaranteed renewal rate of 5.09%. North Community Bank of Chicago has been offering one-year CDs paying 4.5% for new deposits of at least $5,000. If you open up a checking account with direct deposit, the rate increases to 4.75%. Why Are Bank P/Es So Low? Vitaliy Katsenelson, CFA Mootley Fool 2-10 I thought that banks usually trade at lower price-to-earnings ratios to the market because they are considered riskier investments as a result of their high use of debt. Mootley Fool writers Stephen Simpson and Nate Parmelee thought that the larger banks generally have lower P/Es because they are perceived to have a slower or more limited growth potential. So I looked at some larger banks to see whether they had been slow growers in the past, and I couldn't reach that conclusion. Many of these banks, in fact, had achieved very respectable earnings growth and paid above-average dividends in the process. I then looked at expectations for future earnings growth, and they appeared not to be below average, either. With the exception of Fifth Third, the rest of the pack was trading at a substantial discount to the market and still are. The answer must be more complex than just the growth rates. I believe the answer to banks' lower P/Es lies in the following four factors. 1. Cyclicality The banking business is closely tied to the health of the economy. As the economy expands, demand for loans increases and bad debt declines -- a combination that improves banks' profitability. Because investors pay up for predictability, they rarely pay a full market multiple for the volatility that comes with cyclical companies. Cyclical heavy-industrial companies usually trade below the market P/E just as a many banks do. 2. Financial leverage We have not had a bank crisis in the U.S. for a while, so most investors have forgotten just how risky banks can be. But as Warren Buffett has said, by the time you find out a bank has a problem, it will be too late. The equity at most banks stands at meager 6% to 10% of total assets, so when a bank does make a mistake, its high leverage amplifies the problem. 3. Interest rate volatility Banks are subject to the risks that come with changing interest rates. They prosper when the difference between long-term and short-term rates is high. Many banks have addressed the problem by boosting their fee businesses. For example, fees account for a full 46% of U.S. Bancorp's income, thereby making the company less susceptible to swings in rates. 4. Complexity of financials I could teach my 4-year-old son to analyze retailers' financials in about 20 minutes. Where analyzing a retailer is like playing checkers, analyzing a bank is akin to playing two-dimensional chess. Investors need to look at financial statements and dozens of other sources to assess a bank's true performance. That's a problem, since investors tend to embrace simplicity and shy away from complexity. To make things even worse, banks' financials are riddled with assumptions. Although all companies have to make some amount of assumptions in their financials, the complexity and magnitude of those assumptions increase exponentially with banks. Consider, for example, that it's not uncommon for a high-growth bank to have its expected credit losses understated because of the immaturity of its portfolio (new loans have not matured yet). However, as growth decelerates and large portion of the loans matures, credit losses may skyrocket beyond the estimated provisions. The quality of growth The very size of large banks often gets in the way of their ability to continue producing high-percentage growth. Instead, the bulk of growth for large banks comes from acquisitions. An acquirer is able to fold most of the acquired bank's operations into its existing infrastructure, which, in turn, results in huge cost savings and, of course, higher earnings. That sounds great on paper. However, acquisitions come with risks, including integration challenges. Bank One (now part of JP Morgan Chase) learned about that problem firsthand when it acquired First USA. Soon after the acquisition, Bank One ran into huge problems with the incompatibility of the combined companies' computer systems, and the stock tumbled as a result. Regions Financial had similar integration problems after making successful acquisitions for a long time. To sustain its growth, it eventually had to start marking larger and larger acquisitions, and that's when the problems began. In addition to the integration risks, bank executives' egos and their desires to manage bigger empires often get in the way of common sense. Ultimately, the acquirer overpays for the acquired. Still, despite all of the potential pitfalls, acquisitions have been the main source of EPS growth for most large banks. In fact, I can't think of a large bank that became large by way of organic growth. Not one! The bottom line Growth by acquisition is much riskier and usually more expensive than organic growth. Investors recognize that risk, and thus they put a lot less value on large banks' growth. So, to a large degree, Joey, Stephen, and Nate were right: Slow organic growth is, in part, responsible for banks' below-market valuations. However, I believe that higher risk caused by cyclicality, high financial leverage, and the complexity of financials contributes to the lower P/E as well. UBS Profit Triples on Asset Sale - Dividend Is Increased Katharina Bart, WSJ 2-15 UBS AG said its Q4 net profit more than tripled, boosted in part by gains from an asset sale to Julius Baer Holding AG. The bank said it will increase its payout to shareholders and buy back more of its shares. UBS, the second-largest European bank by market capitalization after HSBC Holdings PLC, said net profit rose to 6.49 billion Swiss francs ($4.97 billion) in the quarter from 2.08 billion francs a year earlier. Profit from continuing operations, which analysts said is a more-accurate indicator of UBS's business, rose 32% to 2.63 billion francs from two billion francs in the year-earlier period, excluding gains from the sale to Julius Baer. UBS's total operating income rose 21% to 13.87 billion francs from 11.44 billion francs a year earlier. Total operating income includes a holding in Swiss electricity company Motor-Columbus AG, which UBS has said it plans to sell. A sharp rise in profit from UBS's flagship private-banking operations helped results, as income, especially from commissions and fees, offset higher expenses, which rose because of legal provisions. Net new-money inflows at the private-banking operations -- excluding U.S.-based operations -- doubled to 13.2 billion francs from 6.5 billion francs. The bulk came from new markets such as Asia, but also European markets that UBS has pushed into, such as the U.K. and Germany. UBS said this year started on a positive note, and that its investment-banking-deal pipeline, an indicator of future revenue, was "promising." Within UBS's investment bank, revenue slipped at the fixed-income business, which includes interest-rate and currency products. Chief Executive Peter Wuffli said the bank is taking measures to counter that, including expanding operations in areas such as emerging-market debt and global syndicated finance. The move is aimed at catching up to peers such as Deutsche Bank AG, which has proved successful in areas such as local-currency emerging-market debt. UBS said it plans to raise its overall payout to shareholders to 3.80 francs a share from three francs in 2004. The dividend increase is partly the result of the disposal of some of UBS's private-banking and fund operations to Julius Baer last year. UBS said it plans to buy back as much as an additional five billion francs of shares after a current buyback valued at 3.6 billion francs ends March 7. Analysts said they were disappointed that UBS hadn't increased its dividend even further. February Ratings Changes On 2-24 JP Morgan downgraded NFB from Overweight to Neutral. January Ratings Changes On 1-04 Banc of America Securities cut Citigroup and Wells Fargo to "neutral" from "buy," saying the banks' shares are nearly fully valued. Coverage initiated on US Bancorp by Friedman Billings. On 1-11 CSFB downgraded BB&T from Neutral to Underperform, FITB from Neutral to Underperform, and RF from Neutral to Underperform. On 1-23 Harris Nesbitt Upgraded KEY from Neutral to Outperform. Sky to Acquire Union Federal Bank of Indianapolis PRNewswire 2-03 Sky Financial Group announced the execution of a definitive agreement to acquire Union Federal Bank of Indianapolis and its parent company, Waterfield Mortgage Company. Union Federal is the fourth largest bank in Indianapolis and operates 44 full-service banking centers. Sky Financial's transaction is for the acquisition of Waterfield's retail and commercial banking business conducted primarily through Union Federal Bank. This transaction is valued at $330 million. The merger is expected to be accretive to earnings per share by approximately $.02 or 1% in the first full year of operations and $.05 or 2% on a cash basis, due to the expected cost saving benefits achieved through the integration of systems and support functions, improved branch efficiencies and increased alternative delivery channels for financial products and services. After-tax merger-related costs of approximately $14 million will be incurred to complete the merger. Giving effect to the acquisition of Union Federal Bank, on a pro forma basis, Sky Financial will have approximately $18.4 billion in total assets, $12.7 billion in total deposits and $1.6 billion in total shareholders' equity, with approximately 336 financial centers in Ohio, Pennsylvania, West Virginia, Indiana and Michigan. On a pro forma basis based on asset size, the combined company will be the 33rd largest publicly-held financial services company headquartered in the U.S. HU Acquired [thus dropped from this database] PRNewswire 2-01 TD Banknorth (BNK) on Wednesday said it had completed its acquisition of Hudson United Bancorp (HU), one of New Jersey's largest banks, and elected two former Hudson directors to its board. Critics Fear a Wal-Mart Move Into Banking Kathleen Day, Washington Post 2-12 Wal-Mart entered the grocery business in 1988. Today Wal-Mart is America's biggest grocer, with 16% of the U.S. retail food market, and its sales continue to climb, even as dozens of grocery chains struggle. Wal-Mart's jumped into toys about 15 years ago. Wal-Mart now has 28% of that market. The list of Wal-Mart's effects on businesses goes on and on. Congressional lawmakers and federal regulators now face a tough question: Should they permit Wal-Mart to use a legal loophole to enter banking and potentially do in that arena what it has done to nearly every other consumer product and service it has touched? The retailer no longer wants a full-service bank, only a limited-purpose one. It has whipped up longtime Wal-Mart critics, including labor unions, consumer groups and some congressmen on both sides of the aisle, who say the company is already too big, with too much power over the American economy, sometimes to the detriment of workers' pay and domestic jobs. Charles Fishman, author of "The Wal-Mart Effect," is undecided: "I don't know if Wal-Mart would be good or bad for banking in the long run. But I'll bet ATM fees would come down pretty quick." At issue is the possibility that Wal-Mart and a dozen other nonfinancial firms would be allowed to erode a prohibition that's been in place for most of America's 230-year history barring commercial firms from owning full-service retail banks, and vice versa. Supporters of the ban say letting commerce and banking mix would foster unfair concentrations of power, create conflicts of interest in how credit is granted and perhaps one day burden taxpayers should the failure of a bank and its affiliate put at risk the FDIC. "What's really at issue is the nature of the American economy," says Rep. Jim Leach (R-Iowa), who for two decades has fought efforts by industry to lift the ban. "If such concentrations are allowed, you could have our largest banks combined with our largest retail companies and high-tech companies and create questions about how credit is allocated. It has enormous consequences for competition, and I think America would become less competitive in the world." But others say low pricing is king. "Wal-Mart sees banking as an opportunity to give the customer a better deal," says Howard Davidowitz, founder and chairman of Davidowitz & Associates Inc., a consulting and investment banking firm. "That's what Wal-Mart's about." Sparking the current uproar is Wal-Mart's application to obtain federal deposit insurance, which is required before it can open a state-chartered bank in Utah known as an industrial loan corporation, or ILC. Congress overlooked the ILC loophole in 1999 when it passed laws to deregulate financial services. Congress specifically addressed the issue of commerce and banking: It voted to maintain the ban on mixing the two. A handful of states, including California and Nevada but most of all Utah, grant charters for ILCs. Sixty-one ILCs have been granted since 1984, nearly half of them after the 1999 financial deregulation bill passed, and six applications, including Wal-Mart's, are pending. The advantage of an ILC -- aside from the fact that commercial firms are prohibited from owning a traditional bank -- is that it allows its owner to bypass regulation by the Federal Reserve Board. Instead, ILCs are supervised by their state regulator and, at the federal level, the FDIC, which in addition to insuring all banks has for decades regulated some state banks. The FDIC has said it has the capability to provide sufficient federal oversight of these state banks. Leach and others disagree, as did the Government Accountability Office, the research arm of Congress, in a report last fall. The majority of ILCs are owned by financial companies such as securities firms Merrill Lynch and Goldman Sachs that under deregulation could own a traditional bank but don't want to because that would require they be regulated by the Fed as bank holding companies. The Fed requires holding companies to maintain certain amounts of cash against potential losses, and that's an expense these firms want to avoid. The dozen or so nonfinancial companies that own ILCs -- BMW of North America LLC, Volvo and the like -- do so to finance purchases of their cars and motorcycles. Controversy has surrounded ILCs for several years, but the debate has been mostly among lawmakers and regulators. Not until Wal-Mart applied to the FDIC did the issue attract widespread public attention. Partly it's Wal-Mart's sheer size. But it's also because of Wal-Mart's employment and pricing practices. For years, labor unions, employees in dozens of lawsuits across the country and even state legislators have criticized the company for low pay and health benefits. Critics also say the low prices the company uses to dominate industries have put many smaller companies out of business and shipped jobs to cheaper overseas labor markets. Three dozen members of Congress, evenly divided between Republicans and Democrats, have written the FDIC expressing concern about Wal-Mart's application: Twenty-five members of the House Financial Services Committee asked the FDIC to hold hearings before making a decision, which it has said it will do in the next few months. And Alan Greenspan at least twice told members of Congress that ILCs -- especially if given authority to open branches nationwide -- threatened to undermine sound banking oversight by creating a second, parallel system. By contrast, the FDIC, with little fanfare and no headlines, granted Target's application for insurance for a Utah-chartered ILC 18 months ago. Target is using it to offer a credit card to its small-business customers. Wal-Mart uses Target to press its case in its lobbying of Congress, saying it's unfair to let its rival own a bank when it doesn't. Wal-Mart officials say it too would use the Utah bank for limited purposes, namely to accept large deposits brokered through third parties and, by removing the middleman, to lower costs of back-room operations by tens of millions of dollars a year in the processing of 2.5 billion credit and debit-card transactions. That's a change in plan from a few years ago, when the company said it wanted to enter full-service retail banking because that's what its customers want. A spokesman for the company in 2003 said that because Wal-Mart could not find enough banks willing to open branches in its stores, it wanted to do it on its own. At about the same time, Wal-Mart wanted to be gung-ho into financial services, including mortgages. Since then, Wal-Mart has changed its approach. The in-store banks will now be outside partners. Wal-Mart already works with 300 banks that operate branches in its stores. Wal-Mart has 1,980 supercenters, 1,150 of them with full-service bank branches. And Wal-Mart has contracts for an additional 250 branches in its stores. Wal-Mart's contracts with outside banks are long-term, lasting 15 years if a bank wants. And partnering with outside firms is something Wal-Mart is used to. Wal-Mart credit cards are offered through GE Money Bank, and wire transfers around the world go through MoneyGram Payment Systems. But critics remain skeptical that Wal-Mart's ultimate goal has changed. "Nothing would prevent Wal-Mart, once it's granted a bank charter, from coming back to the FDIC and asking to do more with it" said Tracy Sefl, spokesman for Wal-Mart Watch, a coalition of organized labor, community groups, environmentalists and others critical of the retailer's business practices. Wal-Mart and its supporters say Target's approval will make it hard for the FDIC to turn down Wal-Mart. But some government officials caution that the FDIC's approval process isn't automatic. The agency must weigh objective measures, such as Wal-Mart's financial soundness. But it also must consider the "general character and fitness" of management, which could provide room for disagreement. Critics who testify at the upcoming FDIC hearings almost certainly will bring up the sexual-discrimination case against the company brought by more than 1.5 million women and other labor problems, including its settlement last year on allegations it broke child-labor laws. Wal-Mart officials say they look forward to FDIC and congressional hearings as a chance to set the record straight. In the meantime, the company continues to open superstores at a rate of about 22 a month nationwide and searches for banks that will open branches in them. And customers do love having a bank in the stores. Synovus Ups Quarterly Dividend 7 Percent AP 2-22 Synovus Financial Corp., parent of about 40 small-town banks in the Southeast, on Tuesday raised its quarterly dividend 6.8% to 19.5 cents a share from $0.1825 per share. The dividend is payable on April 1 to shareholders of record on March 23. "We are pleased to announce this increase in our cash dividend for the 30th consecutive year," said Richard E. Anthony, Synovus CEO. January Ratings Changes On 1-17 Analyst: Jason Seo at Standard & Poor's upgraded Amsouth Bancorp to 4 STARS (buy) from 3 STARS (hold). Amsouth Bancorp posted Q4 EPS of 52 cents, vs. 49 cents, 5 cents above our estimate. Results were aided by higher-than-expected net interest income and non-interest revenues, and partially offset by higher expenses. We are encouraged by the bank's improved net interest margins and strong growth in loans and low-cost deposits, and we believe its expansion plans in the high-growth Florida market will provide additional earnings momentum. We are increasing our 2006 EPS estimate by 10 cents to $2.17. Our 12-month target price rises by $3 to $31. On 1-06 Prudential Downgraded CMA from Overweight to Neutral. On 1-10 coverage initiated on Colonial Banc at Hold and initiated on Compass Banc at Hold by AG Edwards. On 1-12 Fox-Pitt Starts Associated Banc-Corp At In-Line. On 1-17 FTN Midwest Downgraded CBSS from Buy to Neutral. On 1-20 Morgan Keegan Downgraded FHN from Market Perform to Underperform. NOTE: Please confirm through your own research any numbers on which you are to make a buy, sell or hold decision. The page is ment to be a supliment for those already getting monthly sector updates from their broker. It is the goal of this page to provide more timely data - and perhaps cover a wider array of stocks and different valuation metrics. Data entry errors sporadically happen. Home Page Factoids Previous Update |