5 big winners in the banking crisis

Toronto Dominion

The Canadian bank acquired Commerce Bancorp of the U.S. at exactly the right time. Toronto Dominion didn't overpay (the premium on the deal was just 25%, low by the standards of bank deals) because Commerce was coming out of a period of regulatory troubles.

And now, just when deposits are moving back to center stage as the cheapest source of bank capital, Toronto Dominion finds itself owning a deposit-gathering machine. Commerce Bancorp's emphasis on service and convenience has long let the bank pull in deposits at a pace that far outstripped bank industry averages.

The recent decision to rebrand Commerce branches with the TD logo, which the company says it was forced to do by the threat of litigation, isn't a positive. But in the short run, it shouldn't send current Commerce customers running to find another bank. And in the long, run it gives Toronto Dominion, which had acquired BankNorth in 2005, a single brand identity in the U.S. market. With its home Canadian market essentially closed to foreign competition, Toronto Dominion can use the extraordinary profitability of its north-of-the-border operations to fund further expansion in the U.S.

US Bancorp

Here's what I wrote about US Bancorp after the company announced second-quarter earnings: "US Bancorp missed Wall Street earnings estimates by 7 cents a share in the second-quarter results announced on July 15. The disappointment delivered by this very conservatively managed bank is evidence of exactly how deep the crisis is facing the financial sector. Revenue grew by 8% for the quarter, beating Wall Street projections by roughly $20 million. But the company wound up taking charges that reduced earnings 11 cents a share: a $66 million impairment charge for structured investment vehicle securities and a $200 million provision for credit losses.

"My thesis that this conservatively managed bank will be able to grab market share thanks to troubles at other banks remains intact. Total average loans grew by 12% from the second quarter of 2007. Total average deposits climbed 14% for the quarter."

One comment stood out in the conference call: The company said it would conserve capital by reducing its expenditures on buying back shares in order to protect the current dividend of $1.70 a share (the yield on July 25 was 5.86%) and have enough cash to make opportunistic acquisitions in a battered financial industry.

I like that thinking.

Wells Fargo

The bank is now reaping the rewards of keeping its powder dry. The company did add $1.5 billion in the second quarter to its provisions against bad loans, but net charge-offs climbed to just an annualized 1.55% for the quarter.

The relatively modest losses have let Wells Fargo increase its lending just as its capital-constrained competitors have pulled back. Earning assets grew at an annualized 15% rate from the first to the second quarter of 2008 and 20% from the second quarter of 2007. Average total loans climbed 18% from the second quarter of 2007 and at an 8% annualized rate from the first quarter of 2008.

The bank's decision to increase its quarterly dividend by 10% to 34 cents a share was the equivalent of taking out a huge billboard saying, "Hey, we've got the cash to raise the dividend, so we've sure got the cash to lend to you."

Having the cash to lend when other banks don't has let Wells Fargo increase the already hefty difference between what it pays to raise capital and what it collects from borrowers. That difference, the net interest margin, climbed to 4.92 percentage points in the second quarter, up 0.32 from the first quarter of 2008. As of July 25, the stock showed a yield of 4.67%.

3 also-rans and a warning

These five stocks are, at this point in the crisis, the clearest winners. But I've got three other stocks that could join this group if things break right in the next six months to a year. This group consists of, in alphabetical order, Banco Santander, HSBC and State Street (STT, news, msgs).

It's too early to tell whether these three have put their biggest losses behind them. They all still hold the possibility of a big negative surprise on their balance sheets. If the worst is indeed over for these three companies, then I'd move them to my winners group. Until then, it's wait and see.

That is pretty much my reaction to the sector -- even to these winners. Financial stocks rallied 30% in a matter of days before selling off. I don't think the rally is sustainable, and I don't think it is based on fundamentals.

Credit write-offs are just now spreading to credit cards. If you want to see the big problem now looming, take a look at the most recent quarterly earnings from American Express (AXP, news, msgs). It's clear that the same consumers who couldn't pay their mortgages now can't pay their credit card bills either.

I'd look for another drop in the sector before I even thought about buying. And then I'd start by looking at the stocks where the dividend yields are high enough to give the price some support and you some income while you wait for the sector to turn upward in a lasting way.

Developments on a past column

"Can General Motors come back?": Saw this coming, didn't you? On July 25, Chrysler killed its leasing program. Buyers will no longer be able to lease a new Chrysler product through Chrysler's own lending arm. The company will, apparently, still sell cars for cash, and it will offer new, longer loans that carry the same monthly payments as current leases.

Leases now account for about 20% of the company's sales. So why make it harder for customers to buy a car at a time when the auto industry is struggling with falling sales? Because leases were costing the company big bucks.

Leases are attractive to buyers because monthly payments are lower than on auto loans of comparable duration. The payments are lower because leaseholders turn their cars back to the company after two or three years, unless they opt to buy the vehicles at the end of the leases. In recent months, as leaseholders have turned in increasing numbers of big SUVs and trucks they would have bought before gasoline climbed to more than $4 a gallon, auto companies have wound up with huge inventories of used -- sorry, "pre-owned" -- vehicles that they can't move, except at big losses.

The day before Chrysler's announcement, Ford Motor (F, news, msgs) announced a $2.1 billion write-down on leases made by its financial arm, Ford Motor Credit.

Chrysler also faced an ultimatum from its lenders: End the leases or pay a higher interest rate to borrow money. With part of the money the company borrowed from banks secured by leases, banks were demanding a higher interest rate to compensate for the falling value of the cars that the company would own after the leases ended.

Chrysler's financing unit, Chrysler Financial, has been trying to persuade banks to renew a $30 billion credit line without a huge increase in interest payments. Chrysler has announced it will offer car loans running to six years at about the same rate as current leases. With defaults on auto loans rising, I doubt that banks will find that a particularly attractive alternative.

Editor's note: Jim Jubak, the Web's most-read investing writer, posts a new Jubak's Journal every Tuesday and Friday. Please note that recommendations in Jubak's Picks are for a 12- to 18-month time horizon. For suggestions to help navigate the treacherous interest-rate environment, see Jubak's portfolio of Dividend Stocks for Income Investors. For picks with a truly long-term perspective, see Jubak's 50 Best Stocks in the World or Future Fantastic 50 Portfolio. E-mail Jubak at jjmail@microsoft.com.

At the time of publication, Jim Jubak owned or controlled shares of the following companies mentioned in this column: ING and US Bancorp. He did not own short positions in any stock mentioned.

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