Ted Allrich is the founder of The Online Investor and author of Comfort Zone Investing: Build Wealth And Sleep Well At Night. In this weekly column, he offers advice to investors who are just getting started.
If you own a bank stock, you know how brutal the stock market can be. Many are down more than 50% as the subprime mortgage mess continues to shock all investors. But some banks are being punished for being a bank, not for mortgages they don't even own.
Not all banks are the same. Most banks make mortgage loans to several different kinds of buyers for different types of properties: existing homes, new construction, and/or commercial buildings. Or they only make loans to well-qualified buyers, ones with good income and high FICO scores (your credit score). Still others make no mortgages at all, have a diversified revenue stream and are only guilty of being called banks. Finally, there are banks that have a large percentage of their revenues from international lending. Smart investors will look for all of these types and start investing a small amount in several of them, then wait for the rally that will inevitably come.
That's because this crisis will pass. It may take a year or more before all the surprises are found, but they will be found, announced, and dealt with. The banks that aren't involved in subprime mortgages will hold up better and most likely will lead a financials recovery. So which banks have no or less exposure to subprime mortgages?
The banks that do processing and trust business are one group. Included are Bank of New York (NYSE: BK), State Street (NYSE: STT), and Northern Trust (NASDAQ: NTRS). For example, BK is one of the world's largest asset administration firms with the 2007 acquisition of Pittsburgh-based Mellon Financial. The merger fit in with the company's other areas of focus, asset management and corporate trust services. Now known as The Bank of New York Mellon, the firm has about $20 trillion in assets under custody and more than $1 trillion of assets under management. The company has a presence in over 35 countries, including more than 80 wealth management offices in the US and the UK. Its Pershing subsidiary is a leading securities clearing firm.
Another example: State Street Bank is among the top providers of mutual fund and pension processing and custody services; its target clients include large-scale institutional investors and corporations who can choose from a service menu that includes accounting, foreign exchange, cash management, securities lending, and more. Its State Street Global Advisors (SSgA) unit performs asset management services. Boston Financial Data Services, a partnership with DST Systems, provides shareholder services to clients. Another joint venture, CitiStreet (with Citigroup), manages retirement and pension plans.
There are others. And not just in banks. They are Savings and Loans, brokerage firms, insurance companies, all of the financials. Investors can find good stocks in each of these, ones that have no holdings in subprime mortgages or have great risk managers (think of Goldman Sachs (NYSE: GS) in the brokerage area). Just because the headlines look bad for many banks or financial institutions in general, it doesn't mean there aren't good investments among them. You just have to look harder and dig deeper to understand exactly what the bank or financial institution does.
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