For Subscribers

Get the complete article now!

TWST: What changed your mind on Bank of America (NYSE:BAC)? Strictly the interest rate picture?

Mr. Temple: It was primarily the interest rate moves, and admittedly it was the last bank I started liking. The final regional name (for now) is more of a long-term investment hypothesis than a rate-driven play. Wells Fargo (NYSE:WFC) will benefit from lower rates but less so from credit problem resolutions and capital markets activities. Instead, Wells should benefit from wider net interest margins and increased flexibility on the lending front. Moreover, Wells is a big beneficiary, cosmetically anyway, of the proposed rules regarding amortization of goodwill, given the number of purchase deals they’ve done, and particularly the First Interstate deal. These accounting changes would take the “headline” multiple down below 16, potentially making the stock more attractive to those investors not already focusing on cash earnings. In terms of the long-term investment proposition, I think very few people would question the quality of the franchise. There are some question marks for the extent to which Wells Fargo has bought growth, but the credit quality is superb and the location in the fastest growing regions of the US offers an easier opportunity to grow revenue and net income. Given the market capitalization, Wells should attract money any time there’s interest in buying financials.

TWST: Ron, have we addressed most of the issues facing these banks, going forward? Is there any risk that you have on your mind that might throw a monkey wrench into the investment opportunities you’ve suggested to us?

Mr. Temple: I try not to get too extreme. For example, people went overboard in terms of the Internet killing the bricks-and-mortar banks. That was the big wrench that was just going to kill all these guys, and that was wrong. Look at the market cap of any of the Internet-based companies. I can’t think of anything that’s going to revolutionize the sector. I do think, again, the traditional commercial banking industry is in a long-term secular decline, and that’s where stock picking becomes very valuable. It’s important occasionally to fly at 50,000 feet, and look at the big picture, to identify firms that have looked at the big picture and have developed creative strategies to face the challenges. Unfortunately, it does seem that there are quite a few banks that are not going to be successful, and over time those banks will either be taken over or will continue to shrink. The only other recent example that people were quite excited about was probably EBPP (electronic bill presentment and payment). Again, EBPP now appears to be just another way in which banks will handle transactions. EBPP will probably reduce bank expenses over time, but it will require an investment up front. Ultimately, the other lesson is that the banks that consistently invest in technology, rather than spending in waves, will succeed. There’s always a new way to increase efficiency, or a new product, or a new challenge, so those firms that have invested in technology and built credible technology teams will succeed. Of course, there always will be shocks to the system but these will be met and resolved. To reiterate, I think it pays to step back and try not to get too excited negatively or positively about the flavor of the month, and to just focus on the quality of management, operating results and the credit portfolio.