Profiting from Foreign Banks

Profiting from Foreign Banks: Discover the Little-Known Bank That Posted 29.4% Profit Amid Global Financial Crisis
A Taipan Publishing Group Strategy Report
By Irwin Greenstein, Senior Research Analyst , Taipan Publishing Group

Conventional wisdom dictates that you don’t buy shares in banks.

Every day, investors are bombarded with devastating news. The housing bubble has wrecked one of the most lucrative industries in history, and it seems there is no way around it for investors looking to buy into a great bank.

One look at the iShares Dow Jones U.S. Regional Banks Index Fund shows how far one of the great American institutions has fallen. One year ago, the index was up to $51.60. Now it’s at $32.70 -- a drop of 36.6%.

It wasn’t that long ago when banks were the safest investment on Wall Street. After all, why wouldn’t you want to buy shares in a bank? These financial institutions are the bedrock of the American dream. Your first college loan, your first house, your first car were all financed by a bank.

The movie classic that surfaces every Christmas, It’s a Wonderful Life, is about a banker -- the conscience, heart and soul of every community.

Profiting from Foreign Banks: This Bank Posted Double-Digit Gains

Then Wall Street stepped in and free toasters were replaced with ARMs that literally imploded the entire industry -- that is, except for one incredible bank that we discovered.

This bank posted double-digit gains in every important technical indicator in 2007. It continues to expand worldwide. And right now it’s near the peak of its 52-week range and is expected to rebound into new highs.

In fact, anyone who got into this stock 12 months ago would be sitting on an impressive gain of 37.3%. This is quite a different story than what you are accustomed to reading about the banking sector.

As we enter the 18-month mark of the subprime meltdown, the shock waves of 2007 are still spooking investors.

The banking sector’s total shareholder return plummeted from 26.1% in 2006 to 1.7% in 2007. The industry's ROE plunged 4.5 percentage points, to 13%, while its cost of equity grew 1.8 percentage points, to 12.6%. Naturally, profits fell from 6.7% to 0.4%.

Profiting from Foreign Banks: Financial Markets Far From Normal

As of mid-May 2008, the banking industry was still reeling. Of all the S&P industry groups, financials led losses. Fed Reserve Chairman Ben Bernanke said, “At this stage, conditions in financial markets are still far from normal.”

Amid the gloom, Bank of America representatives said at an investor conference that customers were feeling “significant economic pressure.” The company anticipated losses in its home equity portfolio to surpass its prior estimated range of 2-2.5%. The stock dropped along with that of JP Morgan.

Bank of America’s chief market strategist, Joseph Quinlan, recently broke the new bad news to investors that the financial crisis is "one of the most vicious in financial history." A research paper from his bank says the related fallout from the crisis has caused $8.6 trillion in stock market losses worldwide, trimming a full 14.6% from the total world market capitalization.

At about the same time, research from Openheimer & Co cut its outlook for investment banks through 2009.

Profiting from Foreign Banks: Losses Could Exceed $400 Billion

It’s been nearly one year since the subprime crisis torpedoed Bear Stearns Cos. The stock rapidly took on water after the company announced that two of its hedge funds had lost $20 billion in risky bets on subprime loans.

No one really sees the proverbial light at the end of the tunnel yet, either. Standard & Poor’s recently said it expects losses could reach $285 billion. Meanwhile, other financial experts say losses could top $400 billion.

If you had invested in the iShares Dow Jones U.S. Financial Sector Index Fund, you would’ve lost 28% when this benchmark slid from $120.32 in mid-May 2007 to $86.68 one year later.

And expect the financial sector to sink lower…

If the subprime debacle isn’t bad enough, banks are now in the cross hairs of the Federal Reserve. The target? One of the most lucrative businesses in banking: credit cards.

Credit card industry profits have risen 48.5% from $27.4 billion in 2003 to $40.7 billion in 2007, according to RK Hammer.

Profiting from Foreign Banks: The Next Debacle: Credit Cards

The lion’s share of that revenue comes from the fine print on the bill you receive every month regarding late fees, balances and assorted penalties that tend to whack consumers upside the head.

In 2007, 11,427 outraged credit card users filed complaints with the Office of the Comptroller of the Currency, which oversees bank-issued cards. The responses were a 13% increase over the previous year.

The Federal Reserve and two other banking regulators stepped in. The federal agencies are ready to introduce aggressive regulations to stop the credit card flimflam, which includes charging interest on repaid debt, charging late fees when consumers can’t meet tight windows for payment and a host of other arbitrary payments that fatten coffers of banks and credit card companies.

Sandra Braunstein, the Federal Reserve's director of consumer and community affairs, said that the Fed would combine new regulations under the Truth in Lending Act and the Federal Trade Commission Act. The tighter restrictions could take effect as early as next spring.

With the clever name of the Credit Card Accountability, Responsibility and Disclosure Act (the CARD Act), the Fed regulation is aimed at reducing consumer debt that quickly piles up from the fine-print intricacies. The CARD Act is intended to tighten industry regulation and oversight, and prohibit unfair and deceptive practices such as universal default and double-cycle billing.

For investors who love to buy bank stocks, it seems that bad news trumps the good. A look at iShares Dow Jones U.S. Regional Banks Index Fund shows it virtually matches the decline seen in the iShares Dow Jones U.S. Financial Sector Index Fund.

Yet, there is one bank that is on the rebound:

1. It missed the subprime meltdown.
2. It will miss the coming credit card clampdown by the Fed.
3. And it’s in some of the hottest markets.

Profiting from Foreign Banks: Our Bank Gains 29.4%

Highlights for 2007 for this bank include profits up 29.4%, EPS up 11.6%, operating profit up 16%, core revenues up 13.1%, net income up 16.7%, operating profits up 17% and dividend up 15.2%.

Now compare this chart for the bank against the other two previous charts. The difference is glaringly obvious…

Why is this bank succeeding while others are on the rocks?

The answer is simple. This bank is in Spain, one of the most robust economies in Europe. And even though this bank capitalizes on the strong Spanish economy and investments in sizzling emerging Latin markets such as Peru, Chile and Argentina, you can trade it on the NYSE.

There are still great banking opportunities. Many investors, though, simply don’t know where to look for them. Instead, they rely on headline investing and follow the herd into an abyss.

If you are interested in learning more about investing in overseas financial institutions check out what Taipan Trader has to offer. Here is your chance to take advantage of these great opportunities.

Originally published June 10, 2008.

Copyright 2007-2008, The Taipan Publishing Group, Taipan Daily and Chart of the Day, 808 St. Paul St., Baltimore, MD 21202. All rights reserved. No part of this report may be reproduced or placed on any electronic medium without written permission from the publisher. Information contained herein is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed.

Back to Taipan Publishing Group's Home Page