Why these bank stocks are soaring... Commercial lending is still rising... Doc's favorite bank stock... This road can make you rich... Join us in Nicaragua... How to make huge money in the resource market...
The stocks of regional banks (as opposed to the mega-banks like Bank of America and JPMorgan Chase) are approaching new highs... Big banks are lending less and selling assets to meet stricter capital requirements and regulations. And regional banks (which can be 1/10th the size of the big guys) are filling the gap.
According to Bloomberg, total loans at the four biggest U.S. banks (JPMorgan, Bank of America, Citigroup, and Wells Fargo) fell 4.9% to $3.04 trillion in the first quarter 2012 from the same period in 2010. Meanwhile, lending in the 17 smallest of the 24 banks tracked by the KBW Bank Index, a bellwether index, jumped 9.8% to $1.27 trillion over the same period.
The big four banks hold 41% of the $7.41 trillion in total loans reported by the Federal Deposit Insurance Corp (FDIC). That's down from 43% in March 2010 when the total was $7.5 trillion. When the big guys start dumping loans, it can mean huge increases in assets and earnings for the smaller players.
Banks are leveraged businesses... So when loan volumes increase, earnings can soar. Dan Ferris explained how beneficial new loans can be for small banks in the April 2010 issue of his Extreme Value advisory. He used the example of Idaho-based bank Home Federal buying assets from Oregon-based Community First.
|
When Home Federal took over Community First, it picked up $143 million of deposits. To acquire Community First's deposits, Home Federal paid a premium of 1%, about $1.43 million. I understand how paying $1.43 million for the privilege of paying interest on $143 million of deposits doesn't sound like a great deal... unless you know what a bank can do with $143 million in deposits. |
|
As I've reported before, our banking system is a "fractional reserve" banking system. It's a great deal for banks... |
|
Let's say a friend wants to borrow money. If you only have $100 in savings, that's the max you can lend. (And you might decide not to lend it all!) But if you're a bank, you could lend your friend $1,000. If your friend paid you, say, 5% interest, you'd end up making $50. That's a 50% return on your original $100. That's pretty much how it works for banks. |
|
When you deposit $1 in your local bank, it puts that $1 in an account at the Federal Reserve and lends out $10 against it... earning interest on all of it. A bank charter is like a license to print money. |
|
It's unbelievable, but that's how it works. When it's done right, bank lending is one of the all-time wonderful businesses... |
|
Especially when your deposits increase nearly 40% overnight. Home Federal can turn its brand new $143 million in deposits into millions of dollars worth of assets. Even with a modest 50% loan-to-deposit ratio, Home Federal can make more than $70 million in new loans. That's $70 million of new assets basically handed to Home Federal by the FDIC: instant 8% asset growth. |
As I said above, big banks are reducing loans and selling assets. One big reason for the divestitures is the government's stricter capital requirements following the financial crisis. Brian Moynihan, CEO of Bank of America, estimated that for every percentage point in extra capital required, regulators reduce potential loans by $18 billion. And they're being forced to sell performing loans (meaning the debtors are paying the interest)... which smaller banks are happy to acquire...
"Big money-center banks had some capital constraints. They actually started paring their loan portfolios. We were able to pick up a lot of customers," Daniel Cantara, executive vice president of commercial banking at Buffalo, New York-based First Niagara Financial Group told Bloomberg. "By no stretch of the imagination were these bad customers... A few large money-center national, international banks had a lot of the market and a relatively small percentage decrease in their portfolio holdings translated to a lot of dollars for smaller banks like us to go out there and add."
Big banks are also focusing on making larger loans to institutional clients, as opposed to small business and individual loans. It takes the same effort to clear a small loan as it does a $100 million loan... But the fees are higher on the bigger loans. And this is at a time when smaller clients are thirsty for capital...
"The community bankers' clientele are more in need of loans right now than the big banks' clientele," Dennis Logue, a professor at Dartmouth's Tuck School of Business and chairman of Hanover, New Hampshire-based Ledyard Financial Group told Bloomberg. "They don't have the big cash stashes that the large corporations have. The large corporations are either sitting on their money or they're not borrowing."
As you can see from the chart below, since regulations kicked in, small banks (as represented by the S&P SPDR Regional Banking exchange-traded fund), are outpacing big banks (represented by Bank of America) by a wide margin:
But that doesn't mean some bigger banks aren't great buys. The banking sector in general is healthy right now. Steve Sjuggerud, Dr. David "Doc" Eifrig, and Porter Stansberry are all bullish on banking. As Doc wrote in his May issue of Retirement Millionaire...
|
A lot of people don't realize the industry is turning the corner quickly. In fact, the U.S. banking sector hasn't been this healthy in more than a generation... |
|
At the core of their business, banks make their money by borrowing at a low rate and lending that money out at a higher rate. With banks paying next to nothing to depositors (which is how they borrow) and then charging 4%-5% for simple loans to businesses, their so-called "interest rate spread" is huge. And that means profits. |
|
Note the rebound of banking business in this chart, which tracks the growth in commercial and industrial lending (Editor's note: We've included an updated chart with the most recent data)... |
|
As you can see, the absolute lending levels are approaching the pre-recession levels of late 2007. And last year, commercial and industrial lending grew nearly 10%... and shows no signs of stopping. |
|
This is good news for the sector. Banking profits come from high volumes and good margins... As I mentioned above, the interest spreads are attractive, since short-term rates are so low. And with growing demand for loans at longer and longer maturities, this suggests even more profits are on the way for banks. |
Right now, Doc has recommended his subscribers invest in one of the largest banks in America. Its earnings have almost doubled since the end of 2009, reaching $15.9 billion in 2011. This company is minting cash and using it to return value as fast as it can to shareholders. Over the past four quarters, the company has paid down $44 billion in debt, paid out $3.1 billion in dividends, and bought back $1.5 billion in stock (combined that represents more than 27% of the company's market cap).
This is one of the safest banks in the world, and it pays a nearly 3% dividend. To subscribe to Doc's Retirement Millionaire newsletter – and find out which bank he currently recommends (without watching a long promotional video) – click here...
This road could make you rich...
As you can see, men are hard at work paving this stretch of dirt...
How can a paved road make you rich? When that road, which was formerly a 12-mile stretch of flood-prone dirt, leads to a secluded development with seven private beaches. I'm talking about Rancho Santana – a luxury beachfront community in Nicaragua being built by Porter's business partner, Bill Bonner.
I've been visiting this property for five years. Porter has been going since the late '90s. When he first visited, Porter had to hack his way through the jungle with a machete on horseback. I was lucky enough to have an SUV and air conditioning on my first trip. The progress is incredible.
The road to Rancho Santana is being paved at the request of Carlos Pellas, Nicaragua's richest man. Pellas owns all the Toyota dealerships in Central America. He recently sold his bank for a couple billion dollars. And he's funneling at least $100 million of that cash into Guacalito, a new development next door to Rancho Santana.
This will be the best resort in Central America. It will have a championship golf course, Nicaragua's finest hotel (insiders tell me it will be finer than any Four Seasons), luxury homes, and the country's first boat marina.
Many Nicaraguan developers have been promising to build a palatial resort here for a decade... But Pellas is actually delivering... And when Rancho Santana opens later this year, prices for Nicaraguan real estate will skyrocket.
While homes at Guacalito will be beautiful, they're also expensive... It will cost at least $500,000 for a decent lot at Guacalito. Premier lots are more than $1 million. And that's not including a house.
But across the cove in Rancho Santana, you can still buy a lot with sweeping, ocean views for just $100,000. And you can build a home with premium finishings for around $100 a square foot. (Similar construction would cost five to 10 times as much in the U.S.) I wouldn't be surprised to see prices in Rancho Santana double in the next five years. Owning property here could be a great way to get money outside the U.S.
Since I visited Rancho Santana last summer, they've finished a beautiful new clubhouse, pool, and meeting area. Here's the clubhouse...
I'm returning in August to see the progress... Rancho Santana is one of my favorite spots in the world to visit and relax. Porter, Bill Bonner, Mark Ford, and several other of my friends own property there. And it's always great to spend time with them in such a beautiful setting.
I'm also going to load up on Nicaraguan cigars. You may not be aware, but Nicaraguan cigars are among the world's best. And aficionados often prefer them over the more legendary Cuban cigars.
Porter and I discovered one of our favorite cigars in the world when we last visited Rancho... No, it's not a Padron Anniversario, which is the "Rolls Royce" of Nicaraguan cigars. It's one-quarter the price. And makes for better smoking...
The maker is located in Granada, Nicaragua, the oldest city in the Americas. It claims the ash from the volcano above Lake Nicaragua (near Granada) enriched the soil, allowing for world-class tobacco.
A representative from the company rolled fresh cigars during a cocktail party we held at Rancho. The company is coming back this year. Buying them in Nicaragua costs half as much it does in the U.S. I didn't buy enough last year... I won't repeat that mistake.
If you'd like to smoke our "secret" cigar and share an ice-cold Toña (the local beer) on the beach, join us in Nicaragua. We will be hosting a small group of subscribers at Rancho Santana from August 1-5. Space is extremely limited, so if you're interested, act quickly.
Also, as a personal favor to me, Marc Brown, Rancho's head of sales, told me he's carving out two or three never-before-seen lots for our group.
We ask one thing... Please come only if you're truly interested in investing in the community. We think Nicaraguan real estate is a great investment today... And we want to make sure serious investors are given priority on this opportunity. Please contact Rancho's head of sales, Marc Brown, to reserve your spot. You can reach him at marcb@ranchosantana.com.
In your inbox later tonight, you'll see a special e-mail from us... We're discussing a little-known way to make huge money in the resource markets. You may have never heard of what we're recommending... But lots of powerful men have, including President Obama, who's used this strategy to make millions of dollars. Keep your eyes open for the e-mail... Or you can click here to learn more...
|
New 52-week highs (as of 6/26/12): Wal-Mart (WMT).
You may remember a video we produced a while back called The End of America... It made a splash in the media. One subscriber asks about it in today's mailbag. Send your e-mail to feedback@stansberryresearch.com.
"Why do you folks not emphasize the folly of purchasing U.S. Treasury Bonds when the return is so low... there are MUCH better yielding corporate bonds and preferred stock shares that are just as safe (maybe more so) than US Treasuries? the US government is technically bankrupt right NOW... without borrowing the money from someone, the US Government cannot pay it's committed obligations NOW! What will happen when the Federal Reserve becomes the only buyer of US Treasuries... will that be the death of the Reserve currency of the world?
"If that will work, without killing the US Dollar, we'll be home free... The Fed will provide the US Government with all the money it wants to spend... like it were the Prodigal Son!" – Anonymous
Goldsmith comment: We've been warning loudly and constantly about the U.S. debt situation and the fate of the U.S. dollar for several years. Porter has long been on the record saying America is in trouble, warning the dollar would lose its place as the world's reserve currency, and advising everyone to avoid Treasurys. It was all in our video called "The End of America." You can watch it here...
Sean Goldsmith
New York, New York
June 27, 2012