Personal Business: Smart Money
BANKS THAT LEND LITTLE MIGHT JUST OFFER YOU A LOT
Are you growing leery of the prolonged rally in bank stocks? If so, you might
want to seek some safety in trust banks. They may not have the appeal of high-flying superregionals, but it's also the case that trust banks don't depend on the low interest rate environment that's driving most bank stocks these days.
Unlike conventional banks, trust banks make very few loans. So the enormous spread between loan rates and the cost of money has little effect on them. Instead, they provide trusteeship and custodial services for the huge stock and bond portfolios of corporations, pension funds, mutual funds, and individuals.
STEADY GAINS. Back-office chores, such as settling trades and churning out statements, may not sound glamorous. But they generate huge fees. The return on equity at trust banks averages more than 18%, compared with 14% at many better-performing regional banks. And while shares in trust banks are hardly hot performers, analysts are betting that they will continue to climb, even if the ardor for bank stocks cools.
If that sounds enticing, there are a few banks you can zero in on. High on analysts' lists is State Street Boston. With more than $1 trillion in assets under custody and a vast data processing operation, State Street is the biggest and probably best-known trust bank.
Because there's little loan risk, the stock isn't cheap. State Street is trading at a stiff price-earnings ratio of 17.2, vs. 9.8 for the top 25 banks. But analyst John Heffern of Alex. Brown & Sons believes State Street will be a solid, steady performer for some time. The bank's earnings, he predicts, will rise 8% this year, to $1.95 a share. He sees a further 10% gain in 1993.
Heffern forecasts even bigger profit gains for Chicago-based Northern Trust. He sees earnings rising 13% in 1992, to $3.85, and 12% next year. And while Northern Trust has been a more active lender than State Street, bad loans account for less than 1% of its portfolio.
Another factor pushing Northern Trust's share price higher is a periodic rumor that the bank may be acquired. Says Advest analyst Frank Barkocy: "It's a clean, well-run institution and obviously a prize acquisition."
You might also want to take a look at U.S. Trust. Although much smaller than the other trust banks, the New York bank is relatively cheap, with a p-e of 11.9.
Keep in mind that investing in trust banks doesn't promise quick riches. But they're relatively safe and dependable. That's saying a lot, given the uncertainties facing many banks these days.AN ANALYST'S
TRUST BANK PICKS
Bank share Price-
price on earnings
July 6, 1992 ratio*
STATE STREET BOSTON 36 7/8 17.2
NORTHERN TRUST 59 13.7
U.S. TRUST 48 3/4 11.9
TOP 25 BANKS 9.8
*Based on projected 1993 earnings
DATA: ALEX. BROWN & SONS INC.