Not All Financial Services Companies Are Created Equally

Just as no two mutual funds are created equally, no two financial services stocks are the same. What makes this niche a little more complicated for investors is that there are many different categories. Some are large-cap versus small-cap, some are regional versus investment, some are dividend-paying versus non-dividend paying and the list can go on for pages.

As many people have seen over the past two years, President Barack Obama has taken a hard approach with the biggest of those financial services firms. It did not help that some of the largest firms in the world needed taxpayer money in order to stay in business (and keep the financial world from imploding); nobody would walk away from such an experience without being kind of resentful. And adding fuel to the fire is the fact that some of these same firms paid big bonuses at a time when people kept losing their jobs and the same homes that these firms helped finance.

The banks described above are the ones that investors should avoid. Not only have they left a very bad taste in the government’s mouth (as well as the general public, to be sure), but they have cut back or eliminated their dividends and are struggling big-time to re-establish themselves in segments that have been forever changed. In addition to this, these bigger banks face an uphill battle when it comes to financial service reform; while they may have repaid their bailout funds, they will still need to change the way they do business and that is like asking a ninety-year old to start writing with his left hand after spending his entire life writing with the right. It can happen, but it will hurt and this old man could likely die before he becomes efficient at making the change.

The banks that will not have such a hard time are those that serve a specific purpose. Those that have a tried and tested formula for creating value for their shareholders (yes, this means profitability) and have continued to build equity on their balance sheets. Some would argue that these banks would resemble the Canadian banks, where their system sees their largest banks heavily involved with retail networks and public lending.

To demystify the point of this article, the banks you want to invest in are the regional banks that continue to provide mortgages and other retail services to customers who work for a living, who have the right capacity to repay what they borrow and have a purpose for those funds. The responsible lenders who cannot make too many bad loans. The banks that pay dividends.

By Suzana