New Year, New Rules: More Than Ever, Thrifts Are a Virtue

Thrifts and banks with big nonlending businesses fit the bill for the year 2001, say the experts. As credit problems continue to weigh on the sector, analysts are steering investors toward banks that are less dependent on lending.

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New Year, New Rules: More Than Ever, Thrifts Are a Virtue

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Financial stocks are among the few sectors still standing in the double-digit-gain corner after a year of volatile market action. A string of recent problems including rising bad loan levels and slower market activity have lately clouded the outlook for some banks and brokerages. Even so, there are still a number of stocks that are reasonably priced and shaping up as solid plays for the year ahead, say analysts and investors.

"The financial sector has been a good sector all year and is still a good place to be," says Carl Dorf, manager of the Pilgrim Bank & Thrift fund, adding that financials are "inexpensive to the market as a whole." Through Monday, the S&P Banking Index was up 9.9% for the year, and the American Stock Exchange Broker/Dealer Index was ahead 18.4%. The Philadelphia Stock Exchange/KBW Banks Index, which tracks 24 of the country's largest banks, was up 12.9%. The KBW Index currently trades at 12 times expected 2001 earnings.

The Syndicate

Syndicated lending, which involves three or more institutions taking pieces of a loan, has brought its fair share of problems this year for companies including Bank of America (BAC Quote), Wachovia (WB Quote) and First Union (FTU Quote), which were stuck with bad loans as large borrowers ran into trouble or went bankrupt.

Many analysts think the problems will spill over at least to the early quarters of 2001. "I would imagine asset-quality issues will continue to dominate, at least for another quarter," says Jeff Runnfeldt, senior analyst in global financial services at Montgomery Asset Management in San Francisco.

UBS Warburg banks analyst Diane Glossman echoes the sentiment. "Life is going to be difficult [next year]. Credit quality will lead the pack in terms of concerns." As a result, both Glossman and Runnfeldt say they would look to fee-based banks, which rely less on lending and more on services such as trust and custody.

High on the List

Runnfeldt likes Wells Fargo (WFC Quote), Bank of New York (BK Quote) and Fifth Third (FITB Quote), all of which fit the bill for "strong fee income," he says.

Also high on the lists of recommendations for the year ahead are consumer-based banks and thrifts, which typically have solid asset quality and respond quickly to interest rate moves. Analysts say the stocks, which trade at lower multiples than their bank counterparts, are a good bet at current valuations and earnings growth prospects, but think the picture will only improve if interest rates start to come down. That is looking like a distinct possibility after the latest Fed meeting.

Tom Brown, CEO of Second Curve Capital, thinks two 25 basis-point cuts would make for the best environment. Among thrifts, he likes Dime Bancorp (DME Quote) and Golden State (GSB Quote).

Brown is also a fan of consumer finance companies including Capital One (COF Quote) and Providian (PVN Quote), which he says are "stealing business away from the incumbents."