Trust and Custody Banks: Financial Winners

NEW YORK ( TheStreet) -- Trust and custody banks were the winners among the nation's largest financial names on Monday.

Shares of State Street of Boston were up over 2% to close at $61.67, while Bank of New York Mellon was up nearly 2% to close at $28.82 and Northern Trust of Chicago was up over 1% to close at $55.11.

The broad indices ended mixed, after the Census Bureau reported Monday that retail sales rose 0.1% in April after falling by a revised 0.5% in March. The consensus estimate among economists polled by Thomson Reuters was for retail sales to fall 0.3% in April.

The Census Bureau also said manufacturers' and trade inventories during March were rose by 0.1% during March from February. Economists had expected inventories to increase by 0.3% during March.

The KBW Bank Index ( I:BKX) was up 0.4% to close at 58.79, with all but four of the 24 index components showing gains for the session.

"We're seeing the green shoots of spring," for the trust and custody banks, according to BernsteinResearch analyst Brad Hintz, who says that the trust banks are a play on the rising fortunes for asset managers.

"It appears that the retail investors in North America are slowly embracing more risk," Hintz says. "That is leading to money flowing into the asset managers, which is a pretty good tail wind for the trust banks."

With continued evidence of sustained economic growth, although some recent economic reports have been more positive than others, investors also see the trust banks as a play on rising interest rates. "We have the trust banks all still marked as 'market perform,' but on the other hand, it certainly is looking up for the group," Hintz says, adding that "they should do very well when rates ride."

The prospect of significantly higher rates weighed on the shares of large mortgage real estate investment trusts. Shares of Annaly Capital Management ( NLY) were down over 2% to close at $14.73, while American Capital Agency ( AGNC) was down over 3% to close at $29.05.

Both REITs feature very high dividends, as the companies borrow at record low short-term rates, while making leveraged investments in long-term mortgage backed securities, much of which was purchased at significant discounts.

Based on a quarterly payout of 45 cents, Annaly's shares have a dividend yield of 12.22%. With a quarterly dividend of $1.25, American Capital Agency's shares have a yield of 17.21%.

With so much at stake, especially if long-term interest rates at some point move up very rapidly, Monday's declines for the above REIT stocks aren't very significant.

RBC Capital Markets analyst Jason Arnold remains bullish on both REITs, with "outperform" ratings, along with a $19 price target for Annaly and a $34 price target for AGNC.

In a note to clients on May 3, Arnold wrote that "Annaly remains a favorite from our coverage -- Valuation remains very attractive at 1.0x book value relative to the roughly 12% dividend yield anticipated over the next 12 months, with returns of this magnitude expected to persist into 2014."

Arnold wrote in a note to clients on AGNC on May 5 that "valuation remains attractive at 1.06x book relative to our sizable 16% forward 12-month dividend yield outlook."

-- Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.