Some Comments On The U.S. Banking Industry

There are over 7,000 commercial and community banks in the U.S. In addition, there are over 7,000 credit unions. Hence consumers have a  plenty of choices to choose a bank that they want bank with. However the big four “super-banks” dominate the industry just like in other industries. These “super-banks” are Bank of America (BAC), Citigroup (C) JP Morgan Chase(JPM), and Wells Fargo (WFC). The majority of mortgages and deposits are held by these four with the rest split among the thousands of other banks and credit unions.

According to a Reuters report from earlier this month, Bank of America has 5,243 physical branches,  JP Morgan Chase has 5,652 branches and Wells Fargo has 6,217 locations.Though many banks offer the latest banking technology to consumers such as mobile banking, they still follow some of the antiquated systems. For example, checks are still widely used and checks processing is one of the big operations of banks. According to a Celent report, the two-thirds of checks written globally are still in the U.S. While much of the world including emerging countries are moving towards electronic payments the U.S. is the only developed country that still continues to adhere to this outmoded payment method.

From USA – world’s largest closed loop payments system? by Brett King in Finextra:

Last year Celent reported that fully two thirds of cheques written globally are still written in the United States. At a time when the world is accelerating towards faster payments, the US has been reinforcing Check21 and propping up a system that was popularized in the 1950s. When put to a vote recently the US banking community voted down the Expedited Processing and Settlement (EPS) initiative at NACHA which would have given real-time ACH payments a chance in the US. As of Q1 2012, the only countries not to have adopted the EMV standard for cards payments were the United States and North Korea. In Q4 of 2012, North Korea adopted the EMV standard leaving the US as the sole remaining holdout, with the debate on EMV rollout for a 2015 timeframe still raging. This is not a globally progressive payments infrastructure.

While free-market capitalism has produced hundreds of startups and innovations in online and mobile payments in the U.S. some basic services needed by consumers are still lacking. For example, it is impossible to easily transfer an amount from one person to another in the same town in the same bank or another bank without paying a hefty fee. This is a common basic feature available in European countries.

Brett noted:

With the exception of Square and PayPal, all of these innovations are very US-specific, and while that’s great for US citizens, the lack of interoperability means that the vast majority of these apps don’t work outside US shores, and hence limit you from sending money cross-border or purchasing from overseas merchants.

Each year close to 70 million tourists travel to the United States, and last year almost 62 million Americans travelled abroad. None of the payments innovations in the US right now address these consumers, nor are they likely to. Some might argue that these 130 million consumers obviously aren’t making enough noise, or retailers, merchants and issuers would have solved the problem already.

While the free market is producing some potentially remarkable innovations, adoption of standards that result in lower cost of delivery, interoperability on a global stage, less payments friction and higher adoption rates should not be viewed as an antithesis to progress.

It is not uncommon for many Americans to spend half a day each month or every few months sorting out their check payments with checkbooks. It is about time that the U.S. banking industry offer some basic services needed by consumers and phase out ancient technologies before jumping into creating apps for the mobile world. Each year millions if not billions are lost by consumers in lost or misplaced checks and banks lose the same if not more in check frauds. So both the parties can benefit by getting rid of this payment method.

Disclosure: No Positions

Historical Performance and Valuation of the S&P 500 Index

The S&P 500 is up 26.72% YTD in terms of price returns and 29.22% based on total returns. Given the strong up this year, many investors are wondering if U.S. stocks are overvalued or fairly valued. With about a month to go this year, any further run to the upside will make the returns even more fantastic.

According to a report by Deutsche Bank Assest & Wealth Management last month, U.S. stocks are fairly valued from a historical perspective.

Click to enlarge

SP500-Historicla-Performance-Valuation

Source: CIO View, October 2013, Deutsche Bank Assest & Wealth Management 

From the report:

The average price-to-earnings (P/E) ratio of the S&P 500 Index is 15.9 and approaching the 10-year average of 16.4. The S&P 500 Index could climb to around 1,800 points in the next 12 months, spurred on by continued profit growth, and we expect the profits of S&P 500 Index companies to increase by 7%. Including dividends, investors in U.S. blue chips could achieve a gain of around 10%.

All the sectors within the S&P 500 with the exception of Real Estate are up by double digits YTD. Hence investors may want to selectively initiate new positions at this time.

Related ETF:

SPDR S&P 500 ETF (SPY)

Disclosure: No Positions

Update:

From Nobelist’s Valuation Measure Draws Questions in The Wall Street Journal on Nov 21, 2013:

Shiller-Chart

Bubble-hunting economist Robert Shiller‘s stock-market valuation measure is waving a yellow flag, but there is a debate brewing over whether even that is too alarming a picture.

Of 15 stock-market valuation measures tracked by Bank of America BAC +0.50% Merrill Lynch’s stock strategy team, Mr. Shiller’s cyclically adjusted price/earnings ratio is the only one above its long-term average.

The CAPE ratio, which aims to provide a long-term comparison point for stock valuations, uses the last 10 years’ worth of profits and controls for inflation.

A Note On Bunzl Plc Stock Split

Bunzl-LogoBunzl plc (BZLFY) stock split in the ratio of 5:1 on Nov 26, 2013 with a record date of Nov 25, 2013. As a result of this split, ADS holders received 4 additional ADSs for each ADS held. Here is the announcement details:

Bunzl SA has informed Citibank that it will change the ratio of its American Depositary Shares (ADSs) to ordinary shares from one (1) ADS representing five (5) ordinary shares to one (1) ADS representing one (1) ordinary share, effective as of November 27, 2013.

As a result of this ratio change, ADR holders will receive 4 additional ADS for every ADS held as of November 25, 2013.

The effective date for the ratio change is November 27, 2013.

Source: Citi Depository Services

On Nov 26, 2013 the stock closed at $113.19 and opened at $22.70 due to the implementation of the split. The stock is up over 36% YTD and over 170% in 5 years as shown in the chart below:

Click to enlarge

BZLFY-5-Years

Source: Yahoo Finance

UK-based Bunzl Plc is  a FTSE 100 company operating in the Support Services sector with a presence in Europe, North America and Australasia. From the corporate site:

Bunzl plc was incorporated in 1940 and listed on the London Stock Exchange in 1957, but its origins date back to 1854 when Moritz Bunzl opened a small haberdashery business in Bratislava, now the capital of Slovakia.

From the company’s profile on Wikipedia:

Bunzl plc is a multinational distribution and outsourcing company headquartered in LondonUnited Kingdom. The company is primarily a distributor of a diverse range of non-food consumable products including food packaging, cleaning and hygiene supplies, personal protective equipment and carrier bags. Its customers include contract cleanersretailerscatering firms and food processors. Bunzl has operations in 23 countries: almost half of its business is conducted in North America, with major operations in Europe as well as a smaller presence in Australasia and Brazil.

Disclosure: No Positions

Knowledge is Power: Mexican Economy, Bubble talk, Open Borders Edition

Mexico’s economy – the bigger worry (beyondbrics)

Is the commodities supercycle over? (Canadian Business)

World’s Safest Emerging Markets Banks in Central & Eastern Europe 2013 (Global Finance)

Waiting for a 10% market correction? Don’t hold your breath (The Star)

Ultra-low interest rates are not normal, and not fair (MoneyWeek)

Europe is falling out of love with open borders (The Guardian)

Walls: Why I’m preparing to buy back in to emerging markets (Trustnet)

Levitate: Dismiss Bubble Talk … for Now (Charles Schwab)

US banks keep up strong results in Q3 (DB Research)

Why Canada’s manufacturing sector is stronger than you think (MaCleans)

Hil-Photo

Knowledge is Power: Cycling, Brazil Stocks, Global Auto Industry Edition

Emerging-Market Banks Threatened by End of Credit Boom (Bloomberg)

A look beyond the Twitter IPO finds rot beneath the gloss of recovery (The Guardian)

Brazil stocks undervalued, favoured for sound governance (The Asset)

Chile should continue strengthening growth and well-being, says OECD (OECD)

World’s Safest Emerging Markets Banks in Latin America 2013 (Global Finance)

Presentation: Economic and regulatory prospects for the global automotive industry (Deutsche Research)

Foreign Ownership of U.S. Assets (CFR)

Cycling v cars – The American right-of-way (The Economist)

Singapore-Sentosa-Island-Laser-Show

  • Sentosa Island Laser Show, Singapore