More From Saul Perez
Analyzing U.S. Bank’s strong 4Q14 results
U.S. Bank (USB) reported strong 4Q14 results on Wednesday, January 21. The bank reported revenue of $5,169 million for 4Q14. This was a growth of 5.7%.
Must-know: The future of banking risks and regulations
Despite Basel III’s shortcomings, you must remember that it wasn’t the Basel norms that precipitated the subprime or global financial crisis. It was the people who didn’t implement the rules properly. Basel III is currently the best possible regulatory framework.
JPMorgan’s Commercial Banking segment had mild results in the 4Q
JPMorgan Chase’s (JPM) Commercial Banking segment provides conventional banking services to corporate clients. It’s JPMorgan’s third largest business segment.
Why Wells Fargo leads in loans
The bank has always focused on its bread and butter revenue-earning stream: loans. Over the years, Wells Fargo slowly realized its goal of achieving a strong market share in lending.
U.S. Bank’s operational profitability measures were mixed in 4Q14
For a bank, the core operational profitability measures are net interest income and net interest margins. U.S. Bank’s net interest income grew 2.4% in 4Q14.
Must-know: Determining a bank’s value
The first challenge is that banks are highly regulated and any change in regulations has a huge impact on the valuation of a bank—the second challenge is that it’s difficult to determine cash flow for a bank because both debt and reinvestment are difficult to calculate.
Capital One’s consumer banking business disappointed in 2014
Overall, Capital One’s consumer banking results were below expectations in 2014. Consumer banking’s total revenue stood at $6,432 million in 2014.
How did banking sector returns fare in 2014?
During 2014, return on equity and return on assets both fell for the banking sector.
U.S. Bank’s growth in residential mortgage loans was modest
At U.S. Bank (USB), residential mortgage loans were $51,872 million at the end of 4Q14. This was a modest growth of 2.2%—compared to 4Q13.
Why Wells Fargo has the highest net interest margin
Maintaining a high net interest margin has always been part of Wells Fargo’s (WFC) strategy. Wells Fargo has consistently been better than the industry’s average net interest margin.
Must-know: Putting the price–to-book value ratio in perspective
We explored the most commonly used valuation metric for financial companies—the price-book value. We also understood the relation between price-book value and return on equity.
Must-know: Is Wells Fargo making boring attractive for investors?
Wells Fargo’s (WFC) broad operation level strategy over the long run can be described by two words—slow and steady. It doesn’t take many risks. It’s stable and boring.
Why U.S. Bank needs to maintain low-cost funding in 2015
Low-cost funding helps U.S. Bank maintain better net interest margins. It gives the bank a strong competitive advantage.
Wells Fargo remains number one in low-cost deposits
Wells Fargo continues to remain a sector leader in raising low-cost deposits. It grew its noninterest deposits by nearly 7.0% compared to 4Q14.
Why Wells Fargo’s future goals will help it grow more
Management sets the vision for an organization. Wells Fargo’s vision is large, but it’s already halfway there. Wells Fargo is the largest bank in the U.S.—by market capitalization.
Traditional assets: Defining active and passive management
Active asset management refers to those asset managers that essentially try to outperform the average market return, a benchmark, or a hurdle rate that may have been set internally.
Why low funding cost is an advantage for Wells Fargo
If a bank is able to keep its cost of deposits low, it will have a competitive advantage. Wells Fargo has the lowest cost of deposits among its peers—despite having a very high deposit base.
Why Wells Fargo focuses on non-interest income
Wells Fargo wants to maintain a balance between its interest income from loans and non-interest income. Non-interest income accounts for nearly 49% of Wells Fargo’s revenues.
Why cross-selling is part of Wells Fargo’s strategy
Wells Fargo’s (WFC) first, and possibly the most important, operational strategy is focusing on cross-selling. It’s the most important pillar of its operational strategy.
Why Wells Fargo is leveraging technology to cut costs
Online banking is the cheapest mode for servicing the customer in the long run. Online banking involves a one-time fixed cost. After that, the maintenance cost is very low.
Why Wells Fargo uses human resources as a strategic tool
Wells Fargo (WFC) believes that people are a competitive advantage source. Integrating sound human resource practices lies at the core of Wells Fargo’s strategy.
Low-cost deposit growth is a key strength for U.S. Bank
U.S. Bank does well in increasing its low-cost deposit base. In 4Q14, money market deposits grew the fastest at 19.7%—compared to 4Q13.
Capital One’s non-interest expenses are controlled
For banks, non-interest expenses can be controlled. Controlling non-interest expenses helps a bank have higher net profitability.
How did loan types fare in 2014?
The individual auto loan was the fastest growing segment in 2014, driven primarily by strong demand, low rates, and banks relaxing lending criteria.
Must-know: The banking landscape
There a large number of players that are each vying for share in the same market—there are a few large players who are present across the U.S., but most banks have pockets of strength.
The main players in asset management
The efficient market hypothesis maintains that the market prices everything correctly and so it isn’t possible to outperform the market in the long run.
How big is the asset management industry?
Audited and verified annual figures at the end of 2013 indicate that total assets under management of US registered investment companies equalled nearly $17.1 trillion.
The salient features of mutual funds
There are investors who are willing to take on higher risk to generate above-average market returns. For these investors, active funds offer the optimal investment avenue.
Low cost, human-error-free index funds gain in popularity
Low cost is one of the reasons we’re seeing growing confidence in index funds. Index funds have experienced net inflows in each of last five years
Close-ended funds: A niche product for wealthy investors
Close-ended funds are a cross between actively managed mutual funds and ETFs. But the cost of trading in close-ended funds is much higher.
The unit investment trust: Asset with an expiry date
UITs investing in bonds have a predefined rate of return for the duration with regular interest payments. This makes the products suitable for long-term investors, retirees, and pensioners.
Unit investment trusts seek investors
Unit investment trusts account for a minuscule 0.05% of the total assets under the traditional investment management space.
Traditional asset management strong despite challenges
A number of factors have contributed to the impressive growth in traditional asset management. Yet at the end of the day, the industry has grown so tremendously because asset managers have listened to customers.
Banks continued to consolidate branch networks in 2014
Banks grew their branch networks at a fast clip from 2000 to 2010. Over the last five years, more banks have been cutting down on the number of branches.
Were banks more efficient in 2014?
In 2014, the banking sector saw increasing efficiency, which saw the long-term trend of efficiency ratios declining.
Loan-to-deposit ratio remained weak in 2014
The Bank of America (BAC), Wells Fargo (WFC), and JPMorgan (JPM), three of the big four, have seen the LDR fall in 2014.
Wells Fargo: Best performing stock of the big four
Wells Fargo was the best performing stock among the big four banks in 2014. It outperformed the other three banks in a range of 6% to 14%.
Wells Fargo continues to impress with consumer loan growth
Wells Fargo’s largest line of consumer loans is its first family mortgages. Those loans stood at $265.4 billion in 4Q14, a growth of 1.9% compared to 4Q13.
Credit card loan growth strong for Wells Fargo in 4Q14
Total credit card loans outstanding at Wells Fargo stood at $31.12 billion at the end of 4Q14. This was a growth of 16% compared to 4Q14.
Wells Fargo’s commercial loan segment is the star of 4Q14
Total commercial loans outstanding at Wells Fargo stood at $414.83 billion at the end of 4Q14. This was nearly 48.09% of Wells Fargo’s total loan book.
Show it: How mutual funds make money
In return for investing a client’s money, mutual funds charge a fee, generally an annual fee set as a percentage of the client’s assets. This fee is the only source of income for a mutual fund-focused asset manager.
JPMorgan’s Private Equity segment was a money spinner in the 4Q
JPMorgan’s last business segment is Corporate/Private Equity. This business segment derives its revenue from JPMorgan’s private equity and corporate functions.
U.S. Bank’s non-interest income was impressive in 4Q14
U.S. Bank (USB) has a balanced revenue profile. U.S. Bank’s non-interest income, also called fee income, accounts for nearly 45% of the bank’s revenue.
U.S. Bank’s non-performing assets declined in 4Q14
U.S. Bank’s (USB) non-performing assets were $1,808 million at the end of 4Q14. The ratio declined by 11.24%—compared to 4Q13.
Index funds offer innovative products, remain competitive
Index funds’ product offerings have evolved. For example, funds based on sector indices have been created, such as the First Trust NYSE Arca Biotechnology Index Fund.
How investors benefit from alternative assets
Despite a unique set of risks, alternative assets provide tools to sophisticated investors to improve the risk-return tradeoff in their portfolios.
Private equity, hedge funds, and other alternative assets
Private equity is capital invested in companies that aren’t listed on stock exchanges. These alternative assets include venture capital.
The defining aspects of alternative assets
Defining alternative assets accurately is difficult, and consensus is hard to find. An important feature of these assets is that they’re actively managed.
The many players in alternative asset management
Some players are present across the spectrum of alternative assets, but most alternative asset managers are present only in a particular asset area.
The relative share of the alternative asset management space
Alternative assets account for about 10% of the total global asset management industry that’s valued at $63.9 trillion. Private equity contributes most.
Growing institutional interest in alternative assets
Pension funds are responsible for 33% of all investments in alternative assets, making them the biggest institutional player in this class.
Alternative asset managers open the door to retail investors
Retail investors are more aware about the benefits of alternative assets. In 2014, investments in alternative-focused ETFs increased by nearly 50%.
Alternative assets likely to see contined growth in coming years
Until now, the clientele for alternative assets was limited. To capture future growth, companies will need to build strong brands and reach more investors.
Alternative asset management trends in 2015
One defining trend to expect in the alternative asset management sector is increased consolidation. Economies of scale will enable operational cost savings.
Results for JPMorgan’s Corporate & Investment Bank sub-segment
The Corporate & Investment Bank business segment is JPMorgan Chase’s (JPM) second largest segment—by sales and profits.
JPMorgan’s Consumer & Community Banking segment’s results
The Consumer & Community Banking segment provides services to retain customers and communities. The fourth quarter wasn’t good for this segment.
JPMorgan’s retail-focused sub-segment declined in the 4Q
The Card, Merchant & Auto sub-segment provides credit card, merchant payment systems, and auto loans to a wide variety of clients.
JPMorgan’s market and investor services were hit in the 4Q
In market and investor services, the best performing product was equity markets. Equity markets’ revenue was $1.1 billion. This was a handsome rise of 25% YoY.
Analyzing the negative trends in JPMorgan’s 4Q results
There were many negatives for JPMorgan in the fourth quarter. We’ll look at the two main negative trends. They were a drag on JPMorgan’s performance.
A brief overview of U.S. Bank
We’ll provide an overview of U.S. Bank. It’s the fifth largest retail bank in the US—by deposits and assets. At the end of September 2014, it held $391 billion in assets.
Commercial loans were positive for U.S. Bank in 4Q14
The commercial loan segment is U.S. Bank’s biggest loan segment. Commercial loans accounts for nearly 30% of U.S. Bank’s total loan book.
Why U.S. Bank’s loan growth showed interesting trends
You need to understand loan categories better in order to see some very interesting trends in U.S. Bank’s loan growth. Its loans are divided into five main categories.
Efficiency ratio improved for U.S. Bank in 4Q14
U.S. Bank led the industry in terms of the bank efficiency ratio. At the end of 4Q14, the sector efficiency ratio was 68.66%.
Why U.S. Bank’s non-interest expenses rose in 4Q14
For banks, non-interest expenses are similar to operating costs for other companies. Controlling non-interest expenses helps a bank have higher net profitability.
U.S. Bank’s loans and deposits stayed strong in 4Q14
On the loans front, U.S. Bank had a loan book of $246.4 billion at the end of 4Q14. This was a growth of 5.9%—compared to 4Q13.
U.S. Bank’s return on equity and assets fell in 4Q14
U.S. Bank’s (USB) return on equity was 14.4% at the end of 4Q14. This was lower than a return on equity of 15.4% at the end of 4Q13.
U.S. Bank’s retail loans performed well in 4Q14
Retail loans account for close to 11% of U.S. Bank’s total loan book. It’s a big focus for most of the banks in the Financial Select Sector SPDR (XLF).
Why U.S. Bank’s credit card loan growth was moderate in 4Q14
U.S. Bank’s (USB) credit card loan book was $17,990 million at the end of 4Q14. Credit card loans accounted for nearly 7% of U.S. Bank’s total loan book.
Wealth, brokerage, and retirement performed well for Wells Fargo
Wells Fargo’s wealth, brokerage, and retirement segment reported net income of $514 million in 4Q14. This was an increase of nearly 5% compared to 4Q13.
Wells Fargo’s payout ratios improve in 4Q14
Wells Fargo’s payout ratios improved in 2014. Dividend payout ratio rose 34% in 4Q14 compared to 29% in 4Q13 due to the bank’s strong capital position.
Wells Fargo’s Tier 1 capital position: One of the best
Wells Fargo’s Tier 1 capital declined in 2014, but it’s not an indicator of weakness. The bank had capital far in excess of regulatory requirements.
Wells Fargo’s nonperforming assets drop: Why that’s significant
Wells Fargo’s nonperforming assets were $15.5 billion for 4Q14, a fall of $739 million from 3Q14. The drop was in nonaccrual loans and foreclosed assets.
Must-know: Traditional banks face challenges
When a borrower isn’t able to pay back the loan, the loan is considered a non-performing asset (or NPA)—since the money for lending came from a depositor, the bank needs a large enough pool of capital to withstand such a shock.
Must-know: Why the FDIC is the second major banking regulator
The Federal Deposit Insurance Corporation (or FDIC) is the second most important banking regulator in the U.S. The FDIC directly examines and supervises more than 4,500 banks and savings banks for operational safety and soundness.
Why the price-to-book value ratio’s the most used valuation
The price-book value ratio is the ratio of the market value of equity to the book value of equity. Price stands for the current market price of a stock. Book value is the total assets minus liabilities, or net worth, which is the accounting measure of shareholders’ equity in the balance sheet.
Acquisitions Should Be Treated with Circumspection
Wells Fargo has always been smart about acquisitions. The same can be said of some of Berkshire’s other holdings such as IBM (IBM) and Coca-Cola (KO).
Borrowing to Invest Does More Harm Than Good
Borrowing to invest is no way to make money, says Warren Buffet in one of his many letters to Berkshire Hathaway investors.
Risk Is a Permanent Loss of Capital
If investors fear price volatility, erroneously viewing it as a measure of risk, they may end up doing some very risky things.
Big Investors Have No Real Advantage over Small Investors
Big investors are likely to have more biases. The most important of these biases is the bigger investors’ self-perceived authority to invest.
Free Cash Generating Businesses Are Best
Investor Warren Buffett believes that the primary objective of any good business should be to generate lots of free cash.
Management Is of Paramount Importance
Would you trust a thoroughbred to win if it had an average or worse, a poor jockey? No, you wouldn’t. It’s the same thing with the management of a company.
Price Is What You Pay—Value Is What You Get
Will the future growth justify the current price? If the price is much higher, then it’s best to avoid investing.
Long-Term Investing Pays the Best
Most of the money Buffett made in stocks including Wells Fargo & Co. (WFC), Coca-Cola (KO), and IBM (IBM) is the result of long-term investing.
Stocks Beat Bonds over the Long Run By a Big Margin
The majority of investors believe bonds are safer than stocks. The main reason is that bonds pay regular interest.
The Buffett Letters: 10 Commandments to Investors
We all know what a great investor Warren Buffett is. His investing prowess is unmatched. And each one of his letters is packed with words of wisdom.
Capital One’s commercial banking loan growth is on track
Commercial banking is used to provide lending and depository services, treasury management, and private banking and wealth management services.
Strength in numbers: Capital One has a healthy deposit base
Over the years, Capital One’s deposit base increased at a steady rate. At the end of 2014, its total deposits stood at $246.34 billion. It was an increase of 9.41%.
What are the recent trends in US Treasury holdings growth?
US Treasury holdings growth has been huge in 4Q14 at $405.35 billion, an absolute increase of nearly $60 billion.
What are the trends in trading assets?
As banks get smaller, trading assets decline significantly. Banks with an asset size lower than $500 million have negligible trading assets.
Why trading assets are an important indicator for banks
Total trading assets at banks stood at $655 billion at the end of 2014. Trading assets have increased by 24 basis points since 2Q14.
Valuation of PNC Bank is close to historical mean
PNC stock was trading at a PBV ratio of 0.75 in November 2012. Since then, the stock has seen a smart move up and trades at a PBV multiple of ~1.08.
PNC Bank’s financial strengths outweigh its weaknesses
PNC Bank has done a good job at reducing its non-interest expenses, but the bank’s efficiency ratio still remains above 60%.
PNC Bank sees improved return on equity
PNC Bank improving its ROE to above 9% and is now outperforming the sector averages in this important return indicator.
Non-performing assets are at a manageable level
PNC Bank saw a declining trend in non-performing assets in the medium term and reported declining NPA for 12 continuous quarters.
Why loans are the most important earning asset for smaller banks
Loans as assets are less important for larger banks, as large banks tend to have a more diversified asset portfolio.
A legacy – Capital One’s credit card business
The credit card business is Capital One’s oldest and the most important business. It’s a business where the bank enjoys significant competitive advantages.
Money spinner – Capital One’s domestic credit card business
The total revenue from Capital One’s domestic credit card business was $13,621 million. This was a decrease of 4.66%—compared to 2013.
Why loan assets are gaining importance in the banking sector
In recent years, trading assets had grown in importance, but after the sub-prime crisis, the importance of loan assets increased again.
How have individual banks fared in earning assets?
Nearly 90% of Wells Fargo’s (WFC) assets are earning assets. This makes it the bank with the largest percentage of earning assets among the big four banks.
Earning assets: What do trends indicate?
There are four banks with asset sizes greater than $1 trillion. Larger banks tend to have lower earning assets.