Inside Financial Services

It’s the 2012 Bankstocks Awards!

Last year's highs and lows in the financial services industry

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It’s time again for the 2012 Bankstocks Awards-our annual roundup of notable achievements (and achievers) in the financial services industry over the year just past. The envelopes, please:

Bank of the Year: Bank of America. This time last year, investors’ general view of BofA was that the company would struggle for years to fix the problems it created for itself during the credit crunch-especially those related to the credit- and putback-related mortgage costs following its disastrous Countrywide acquisition. For all the market knew, those costs would turn out to be bottomless, and sink the company entirely. Beyond that, BofA was (and is) the largest retail bank in the country at a time when bigness in the banking industry was seen as inherently unmanageable and risky. The company’s capital ratios were weak. Worse, the whole enterprise was being run by a lawyer, Brian Moynihan, with scant day-to-day experience in running a bank. What could possibly go right?

Actually, a lot–as the market found out in 2012. It turns out Moynihan seems to know what he’s doing. Mortgage credit costs at BofA are falling as the housing market recovers and the company works through its backlog. Earnings have begun to rise, and should surge once problem loans recede enough that BofA can start to dismantle its massive loan-workout bureaucracy. Further, the company is reducing its doggone complexity by disposing of non-core assets. Most important, BofA was able to improve its capital ratios tremendously last year. The market has noticed all these improvements: Bank of America’s stock rose by 104% in 2012 one of the strongest performances in the sector. We expect BofA’s fundamentals to improve further in 2013.

CEO of the Year: Cathy Nash of Citizens Republic Bancorp. If any bank CEO did a better job than Cathy Nash did of navigating a troubled institution through the credit crunch and then making money for shareholders in the end, I don’t know who that individual is. Citizens Republic is emblematic of what happened to so many banks during the credit upheaval. Every awful detail is there: the untimely acquisition of a real estate lender (in this case, Republic Bancorp.) at the top of the housing market in 2006, ensuing massive credit losses as the housing market and economy turned sour, huge reserve additions and writeoffs, and (of course!) a supervisory agreement with regulators. But this story ended exceptionally well. After Nash became CEO in early 2009, she neither soft-pedaled the bank’s issues nor was panicked by them. Instead, she methodically and rationally worked the problem assets. By the second quarter of 2011, Citizens returned to profitability following 12 straight quarters of losses. The company was released from its enforcement decree in the second quarter of last year, and soon after was able to recover its deferred-tax asset–which boosted tangible book value by 66%, to $17.84 per share. As all this happened, Citizens Republic’s stock rose steadily-to over $17 at mid-year last year from under $8 at the start of 2011. By September, the company announced it was being bought by FirstMerit in a stock deal valued at $22.50. In all, it was a virtuoso performance in bringing a troubled institution back from the brink and actually creating value for shareholders. A job extremely well done.

Non-Bank of the Year: Tree.com. It’s rare to see a company make a strategic move so obviously sound and shareholder-friendly as CEO Doug Lebda’s decision last year to sell Tree.com’s home loan business in order to focus on the company’s core. The move enabled Tree.com to exit a business, home lending, that’s relatively capital-intensive and in which Tree.com has no special expertise, and reinvest in its basic lead-generation business, where it has a substantial competitive advantage. And relative to Tree.com’s size, the numbers weren’t small. When the lending unit’s $45.9 million sale to Discover closed last June, Tree.com’s market cap was just over $100 million. Since then, company has redeployed much of the sale proceeds to develop into a pure lead-generation company across many financial services verticals. It is also using some of the cash to buy back stock. The results have been extraordinary: Tree.com spend much of the second half of last year raising its earnings guidance. Its stock, meanwhile, rose over 230% in 2012.

Best Acquirer of the Year: Ocwen. If there’s been a single business mortgage lenders haven’t been able to get out of fast enough in recent years, it’s been subprime mortgage servicing. Can you blame them? The business is labor-intensive, regularly draws regulatory scrutiny, and can be a PR disaster. Thus since 2011, everyone from JP Morgan Chase to GMAC has moved to exit stage right. Then again, lots of sellers and just a few buyers can make for attractive prices for whatever buyers are left. And in subprime mortgage servicing lately, the buyer that sticks out is Ocwen. In the industry’s stampede to the doors, the company has bought portfolios from Barclays, Morgan Stanley, Goldman Sachs, JPMorgan, and . . . oh, I’m sure I’ve forgotten a few, but you get the idea. Generally, the prices paid for these portfolios have ranged from lowball to downright embarrassing. All the while, Ocwen’s servicing portfolio has ballooned: to $127.1 billion in unpaid principal balance at the end of the third quarter, from $102.2 billion at the start of 2012, and $73.9 billion a year before that. And since Ocwen specializes in subprime, it knows how to earn attractive returns servicing these loans where conventional servicers often can’t. The company’s earnings have surged: Ocwen likely earned $1.44 per share in 2012 according to consensus estimates, up from 75 cents in 2011 and 34 cents in 2010. The consensus estimate for this year is $4.46. As you can imagine Ocwen’s canny acquisitions have been a boon for its stock price. It rose by 132% in 2012.

Oops of the Year: Knight Trading. Want to see a real fiscal cliff? Take a look at Knight’s one-year chart. The stock’s closing price on July 31: $10.33. Closing price two days later: $2.58. Moral of story: don’t forget to test your new trading software ahead of time! . . . Oops is right. . . .

Special Late-to-the-Party Award: Meredith Whitney. It is to Meredith Whitney’s everlasting credit that she chose to strike out on her own with her investment boutique, Meredith Whitney Advisory Group, within a month of what we now know was the rock-bottom low of the financial stocks in March of 2009. Not many analysts have that kind of insight or nerve. Or rather, it would have been to her everlasting credit that she went out on her own when she did if she’d actually recommended a financial stock or two at that point, or sometime soon thereafter. But no. Since MW Advisors opened its doors in February of 2009, the S&P Financials have risen by 127%, yet Whitney only got around to turning positive on the sector two weeks ago. As part of her bullish change in stance, she recommended three undiscovered nuggets called Bank of America (up 198% since February 2009), Citigroup (up 103%), and Discover (up-cover your eyes!-570%). Thanks Meredith! That’s helpful!

Not Sorry to See You Go. Vikram Pandit. As an outsider looking in at Citigroup, I never quite got the appeal Vik Pandit had to the board. He was from the hedge fund world (a relatively minor business at Citi), had no experience running a bank day to day (even one not as globally colossal as Citi is), and was no one’s idea of a charismatic leader. The only positive in my eyes was that Sheila Bair didn’t like him, either, so he couldn’t have been all bad. In the event, Pandit proved insular as a manager and ham-handed in his dealing with regulators. Citigroup was of course a basket case when Pandit became CEO in 2007, but if there’s any evidence he added any material value to the company’s recovery other than cashing the bailout checks the government kept sending, I’ve yet to hear it. Mike O’Neill’s decision as chairman to dump Pandit as early as was practicable was characteristically wise.

Sorry to See You Show: Elizabeth Warren. Oy. Let’s just hope the Senate is as listless this session as it was last. Then again, at least she’s not running the CFPB, unfireable and with ready access to the Fed spigot. Where’s my aspirin? . . .

Congratulations to our winners! And a happy 2013 to all.

What do you think? Let me know!

6 Responses to “It’s the 2012 Bankstocks Awards!”

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  1. John

    Unfortunately Tom you are motivated to use absolute bottom prices to “extreme” your criticisms of Whitney. The 100% right thing to have said, that would get you a lot of respect, is: “Well, Meredith has been late to the party, but still she’s likely be one hell-of-a-lot more successful in the last few years than I have.” Then you could add, “But I intend on getting my reputation back in the future with some better analysis.”

  2. tom brown

    john, you clearly dont know our investment record the last few years.

  3. To Tom's Credit

    Please. What has Whitney been on top of lately? She called for a $60B muni fallout. Where’s that? She reminds me of the Henry Blodget’s of the world during the dot com. Makes a lot of noise, but doesn’t have any real value to offer.

  4. Dr. Roberts

    Not a cheap shot when the woman in question is the scourge of the banking sector. I believe the site is called BANKSTOCKS.COM

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