Evaluating Banks 2



various other financial accounts all linked back to where you currently bank. It ’ s more than $ 100 worth of grief to change all those existing transactions, and in making a transition you ’ d run the risk of having deposits and payments assigned to the wrong account, possibly leading to bounced checks or other problems.
Even if you ’ re just looking for certificates of deposit — where none of the problems involved with swapping checking accounts apply — sheer apathy is likely to keep your money in the same place for long stretches of time. Banks can pay less for deposits than elsewhere and charge more for services, and the vast majority of depositors will put up with it. Economies of scale . Bigger banks (those with $ 5 billion to $ 10 billion or more in assets) can leverage their size to spread fixed noninterest expenses, such as the costs of accounting and account servicing, over a larger base of earning assets. But even a small bank, if it pays careful attention to costs, can generate solid returns more or less like clockwork.
These factors add up to an impressive economic moat for virtually all banks. That moat translates to returns on equity well above the returns required by shareholders.
The factor that turns a great story from anyone ’ s point of view into a near - perfect one for dividend investors is this: Expanding a bank is not easy. A certain level of growth, usually tied to regional economic prospects in the mid single digits, tends to fall into a bank ’ s lap with little effort on the part of management. But to expand a bank internally at the kind of rates that some handsome ROEs might imply — 15 percent or even 20 percent annually — is extremely difficult even for small institutions. In the end, most banks simply kick the profits they don ’ t need for modest growth out to shareholders as dividends — a practice that bankers never gave up, even when other sectors of American industry did.
While a bank ’ s dividend yield and historical growth rate are useful starting points for analysis, these easily obtainable statistics are no substitute for forward - looking fundamental research.
In the context of the Dividend Drill research process, here are some bank - specific factors I consider. To build up some worthwhile estimates, I ’ ll describe my thoughts on a bank once called Branch Banking and Trust, which is now known simply as BB & T Corporation (BBT). Like many deposit takers, BB & T has an impressive record.