Fleet's Got a New Lease on Life

If you are fleet of foot, here is a bank for you.

FleetBoston Financial (FBF - commentary - Cramer's Take), the $200 billion, New England bank-holding company, is turning over a new leaf and leaving behind its recent era of frenzied acquisition growth shepherded by retiring CEO Terrence Murray. Incoming CEO Charles "Chad" Gifford's goals, instead, will be improving service, focusing on the core business and growing from within.

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Recent financial housekeeping positions Fleet to do just that. Although the stock has been one of the laggards of the Philadelphia Bank Index (BKX) since late 1998, Gifford's leadership and a clean slate has the bank poised to rebound.

The bank recently said it will take a billion-dollar ($650 million after-tax) charge to pay for layoffs and to clean up its investment and loan portfolios, including a chunk of its exposure to Argentina. The charge means a 40% reduction in year-over-year earnings but also cleans up Fleet's balance sheet as Gifford's tenure begins.

The charge means Fleet's 2001 earnings will be about $2 a share, a far cry from the $3.37 in 2000. But looking ahead, Fleet could earn $3.25 a share in the coming year, meaning it's currently trading at less than 11 times estimates compared with more than 13 times for the BKX average. By comparison, Citigroup (C - commentary - Cramer's Take) trades at 15.5 times 2002 estimates, while Wells Fargo (WFC - commentary - Cramer's Take) trades for 13.4 times.

However, Gifford and Fleet must prove they are worth the multiples afforded banks that haven't stumbled like Fleet. As a result of Fleet's frenzied and fragmented acquisition strategy, Gifford inherits a bank that is close to the bottom in most customer-satisfaction surveys and has a plethora of businesses that operate with little coordination.

Gifford, however, has indicated his primary goals in 2002 are to improve customer service and focus on cross-selling the range of Fleet financial services to existing customers.

The potential impact of expanding customer relationships is significant. In addition to being the seventh-largest financial institution with more than 1,500 bank branches, Fleet is also the ninth-largest Visa and MasterCard issuer and has an investment advisory arm with nearly $100 billion under management. And the acquisition of Quick & Reilly, combined with its own brokerage business, gives Fleet more than a million brokerage customers.

Clearly, Gifford's challenge isn't to develop services that attract customers but to sell customers on the services Fleet offers. If successful, Fleet can fly.

There are risks, of course: Continued economic weakness will pressure all banks. And Gifford's ability to rally the troops at Fleet to improve service and expand relationships could fail.

Finally, while the writedown in 2001 reduced exposure to Latin America, the exposure is still a concern to some. Salomon Smith Barney downgraded Fleet to outperform from buy on Friday, based on concerns about Argentina.

But even skeptical Salomon analyst Ruchi Madan believes the issue of improvement at Fleet is one of when, not if. "While we expect Argentina to limit upside in Fleet shares in the near term, we believe Fleet's valuation is attractive and we do see an eventual [earnings] rebound," she wrote late Friday.

In the meantime, investors can count on Fleet's 3.9% dividend to provide support, a dividend Fleet says it is committed not only to support but to increase on a regular basis.

For patient investors, Fleet is a story you could take to the bank as 2002 progresses and the economy recovers.

To read Glenn's take on FleetBoston, click here.

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Christopher S. Edmonds is president of Resource Dynamics, a private financial consulting firm based in Atlanta. At time of publication, neither Edmonds nor his firm held positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he welcomes your feedback and invites you to send it to Chris Edmonds. ui