Quality financials are out there

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Just because the financials are in for a few further rounds of pain doesn’t mean that quality financial institutions in the U.S. don’t exist. There is a stark difference in the level of risk some institutions took during the heydays of the housing and credit bubble.

For example, take yesterday. Dour Jamie Dimon reported results that were better than expected and demonstrated that JP Morgan Chase was not nearly as exposed to the mortgage sector as some of its competitors. Yet, he remained cautious about the future, warning us about the uptick in prime mortgage charge-offs in addition to the already known subprime mess and the well-anticipated Alt-A storm to come. Yes, JP Morgan Chase is a major player in the derivatives market and still has significant exposure to yet more charge-offs, but this is an institution which will survive.

On Tuesday, U.S. Bancorp presented its results. They were ugly just like everyone else’s, with profits off 18%. However, they still made a significant profit and they demonstrated that future charge-offs are likely to be less at U.S. Bancorp than the regional banks that are getting annihilated.

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U.S. Bancorp’s second-quarter earnings fell 18 percent, missing analysts’ expectations, as the company more than tripled its provision for credit losses but offered assurances that its credit problems would continue to be manageable. Shares fell nearly 3 percent.

Chief Executive Richard Davis said the Minneapolis-based bank expects to see net charge-offs from bad debt increase in the coming quarter and didn’t expect to buy back stock for the rest of the year

However Davis also told analysts on a conference call that would continue to protect the company’s dividend. ”No bank will protect it harder and hang onto it more than this one,” Davis said.

Davis said it was a ”buyer’s market” for acquisitions in the banking sector, though he added: ”We are not shopping, but we’re listening.”

U.S. Bancorp’s earned $950 million, or 53 cents per share, down from $1.16 billion, or 65 cents per share, during the same period last year. The latest results include 11 cents in net securities losses, reflecting writedowns of structured investment securities and the credit-loss provision.

New York Times, 15 Jul 2008

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When all is said and done the likes of U.S. Bancorp and JP Morgan will come out of this crisis in a favorable position and be poised to benefit at the expense of weakened and over-leveraged competitors. Bank of New York Mellon is another institution to like. Wells Fargo is another (although I did not like their dividend increase in the least. It may have been a signal, but capital is scarce now and Wells Fargo is already yielding 6%+.)

Would I buy shares in these companies now? No, we have a long way to go before the financial services sector hits bottom. But, when it is time to buy and capitulation has set in, at least we know know how to separate the wheat from the chaff and who to buy. In the meantime, look at rallies like those in financials the past few days as short-covering rallies, dead cat bounces, suckers’ rallies or whatever you want to call them.

For now it is still buyer beware.

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