Equity analyst Richard Bove of Rochdale Securities closely tracks banks, including Bank of America, Morgan Stanley and Wells Fargo. He recently spoke with Research about what the past year has been like for these companies and the year ahead.
How are these companies doing overall vs. 12 months ago?
There's a world of difference. A year ago, the markets were in the midst of the financial crisis, and the Federal Reserve and the Treasury Department were scrambling to find liquidity to keep the markets open.
Most of these companies faced sizeable write-downs for the vast majority of assets they had kept on their balance sheets. The net effect was, basically, that these companies were in a position in which they were struggling for survival.
Clearly, today, the industry does not need the government's assistance to keep the financial markets open. They are functioning on their own as they would in a normal environment and are presenting opportunities for the firms that survived the downturn - which Wachovia and Merrill Lynch did not.
Wells Fargo exists, and Bank of America exists. Both those companies are benefiting as a result of their acquisitions they made of the brokerage portion of the business.
Clearly, Merrill Lynch did not have a traditional banking practice. Therefore, the only issue there was to get rid of the write-downs and to allow Merrill Lynch to function as it has historically, which is what it's now doing and is accretive to Bank of America.
At Wells Fargo, the brokerage portion of that company is doing reasonably well. But the banking portion that it acquired from Wachovia is not and is creating sizeable losses.
What are your thoughts on how these companies will do in 2010?
If you assume that the economy is going to continue to improve, then it is likely that those businesses will be dramatically stronger.
The markets should be higher, there should a large number of equity offerings, there should be a significant number of mergers and acquisitions. So, for the next few years, these companies should do relatively well, until we hit the next cycle, in which case they will get set back again.
Are there any particular advantages or disadvantages facing these firms?
Bigger companies that have more capital and a wider away of product have an advantage over smaller companies with less capital and a smaller array of product ... The company with the most capital, most products and the best management is likely to do better in the marketplace.
What is your view of management at these firms?
BofA has no management at the moment and is seeking a new CEO. Until it locates that CEO and articulates what its strategy is going to be, it's hard to argue that its management is better or worse than somewhere else.
Historically, its management has been better than its industry peers as demonstrated by the fact that it went from being a small bank to being one of the biggest in the United States.
In terms of Morgan Stanley, it just made a complete change in management again [on December 8], and I think that this inability to put in place one management team and one strategy is a problem for that company. I rank that firm the lowest at the moment, because it keeps turning over management ...You cannot run a company that way. It is bad, bad policy.
Wells Fargo management happens to be superb, the best of these companies mentioned. The banking side of its operations is actually doing pretty well.
There are problems associated with the acquisition of Wachovia that's caused its business model to be set back somewhat. In terms of whether or not it's been executing the strategy that it's had for years, the answer is yes. It just has to assimilate the problems caused by this acquisition.
If you make the assumption that the economy has strengthened and that the number of new issues coming out has increased and that there's been an increase in mergers and acquisitions, then you have to assume that the brokerage business will look better 12 months from now.