5 big winners in the banking crisis

By Jim Jubak

Where there are losers, there are going to be winners.

In my previous column I picked five financial companies that had lost part or all of their competitive edge because of the current crisis in the financial industry.

All these companies -- American International Group (AIG, news, msgs), Citigroup (C, news, msgs), Merrill Lynch (MER, news, msgs), Wachovia (WB, news, msgs) and Washington Mutual (WM, news, msgs) -- will, at best, lose market share to rivals.

Today's column is about the five financial companies that are best positioned to pick up the pieces. Each one is an intense rival of one or more of the five companies so damaged by the meltdown in the markets for everything from mortgages to credit cards to car loans to complex instruments that were supposed to take the risk out of buying debt.

Each one of these winners is going to gain market share at the expense of its challenged competitors. It's pretty easy to pick up business against a competitor that's still firing people, selling off whole businesses and scrambling to find enough capital to keep regulators at bay. The issue for these five winners isn't whether they'll grab market share but how much they'll seize.

My five winners from the financial crisis are ING Group (ING, news, msgs), JPMorgan Chase (JPM, news, msgs), Toronto Dominion (TD, news, msgs), US Bancorp (USB, news, msgs) and Wells Fargo (WFC, news, msgs). I've written about ING, Toronto Dominion and US Bancorp before. All three are members of my 'unfixed-income' portfolio, and US Bancorp is a current Jubak's Pick. But the two others are new to this column.

After discussing each of these five, I'll name three other financial stocks that I'd add to this group if things broke in their favor in the near future.

ING

This Dutch bank and insurance company is positioned to pick up the pieces dropped by Citigroup and American International, both internationally and inside the United States. To give you just one glaring example of the way that ING is expanding into markets where challenged competitors are pulling back: In July, Citigroup announced the sale of its German consumer-loan business, with 340 branches and 3.2 million clients. In May, ING announced that it would buy German online mortgage broker Interhyp for about $644 million.

Before the current crisis, I would have identified Citigroup, American International and HSBC (HBC, news, msgs) as the leaders in the race to build dominant global financial brands. Stumbles by Citigroup and American International have thrown the race open to new players.

Of these, I think ING is most likely to come out of this crisis as a new member of the global top three. The company already has 75 million customers around the world, and it's making all the right moves to expand that number. About half of ING's business is insurance. In that business, ING has been busy shifting capital from mature West European markets to faster-growing markets in Central Europe and Asia. For example, on July 9, the company received regulatory approval to enter the insurance market in Ukraine.

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In the banking part of its business, ING has stepped up its penetration of the U.S. market through its online ING Direct business. ING is an aggressive accumulator of online deposits, with more than $300 billion in online deposits worldwide. In the post-crisis world, raising funds for making loans from relatively low-cost deposits instead of in the capital markets will be a huge competitive advantage.

The company is also going after the lucrative and fast-growing market for managing retirement money. On July 1, the company acquired CitiStreet, a retirement plan and benefit service and administration business. The deal makes ING the third-largest defined-contribution pension business in the U.S., with $300 billion in assets under management. The company's strategy is to make smaller acquisitions of businesses that add to its existing core. In the current crisis, there are likely to be lots of businesses that fit that bill for sale.

(The stock now yields more than $7. Be careful when calculating yields because the company pays dividends twice a year instead of the customary four times.

JPMorgan Chase

It's not that the bank has been managing its business perfectly during the financial crisis; the company admits it made a mistake when it increased its mortgage lending in California in 2007 in an effort to take advantage of competitors' problems.

It's just that JPMorgan Chase's mistakes have been so much smaller and are supported by a much stronger balance sheet. For example, it looks like the charge-offs on its $95 billion home-equity portfolio will peak at about $700 million per quarter. That's about a 3% annual rate. No bank ever likes to take a $700 million charge, but it's surely better to be talking about millions with an "m" rather than billions with a "b."

And unlike many of its competitors, JPMorgan Chase doesn't have any need to raise new capital. With a Tier 1 capital ratio of 8.4%, the bank has one of the strongest balance sheets in the sector. (A 6% ratio is the minimum to be considered well-capitalized by regulators.) It's that strength that let the bank pick up investment bank Bear Stearns for a song in a deal brokered by the Federal Reserve. That deal moved the bank's investment banking business into new markets.

The bank hasn't ignored its retail side either. The 2007 grab for market share in the most distressed mortgage markets may have increased charge-offs for bad debt, but it increased the bank's market share as well. Net revenue at the mortgage banking unit climbed 46% in the second quarter of 2008 from the second quarter of 2007, and net income climbed 138%.

What's ahead? The bank will use its balance-sheet muscle to pick up the businesses it finds most attractive around the world. On July 25, the bank began talks with National Australia Bank (NABZY, news, msgs) and Banco Santander (STD, news, msgs) to buy and break up deeply troubled United Kingdom mortgage lender HBOS (HBOOY, news, msgs). Right now, JPMorgan Chase can sit back and see what gems the crisis might put into play. Nice position to be in.

Continued: Toronto Dominion, US Bancorp and more

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