A bank worth backing

Bank shares are well and truly out of favour. But there is one dark horse that's doing very nicely, says Tim Bennett.

It's all doom and gloom in the UK banking market. This morning, selected employees at Lloyds Bank have been summoned to explain their role in the Libor fixing scandal. The whole issue now hangs like a dead albatross around the necks of any banks remotely linked to the key Libor interest rate.

But meanwhile, one or two banks are soldiering on, largely immune to this latest in a long line of banking scandals. Indeed they are doing quite nicely thank you. One of them is Wells Fargo. Spread betters should take note.

Wells is one of those names that slips under the radar of many UK investors. They don't have a flash chief executive cut in the mould of Bob Diamond. They don't do lots of sexy high-risk stuff that grabs headlines. Some might say they are a rather dull bank. But right now, boring is beautiful. Indeed, if more of our banks were run this way, the banking system might be in better shape.

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The bank is the biggest mortgage provider in the US by some way. It originated 32% of all US mortgages in this quarter, down from a heady 39% last quarter. Analysts reacted badly to that news and the shares were marked down.

But underneath this short-term blip lies a formidable money-spinning machine. Indeed, so strong is the US mortgage unit (the bank has capitalised on borrowers taking advantage of record low rates), and so well managed, that US investor Warren Buffett recently said the bank should aim for $1trn of mortgage business after describing the mortgage business as "sensational".

So where's the other evidence of good management? Here are two key pointers.

First, the bank has managed to maintain its net interest margin (NIM) in short, the gap between interest received and paid as a proportion of the total loan book) at a time when other banks have found their interest income under particularly strong pressure.

Second, the bank continues to keep a strong grip on costs expenses as a proportion of income are around 55-59%. That's on target and compares well to its peers.

No wonder its last set of published results was record breaking (albeit this was fully expected by analysts at the time) with net income up 18%. Why? As their chief financial officer Tim Sloan put it to the Associated Press: "it's not that we don't make mistakes", but rather, "we don't take on risk".

That's why the press tends to focus on rivals such as JP Morgan, still reeling from one-off bad bets by its traders the latest a $5.8bn whopper.

Sure, there are risks that the bank can't control a sudden US slowdown being the main one. And in general I hate banking stocks, as most are tainted by scandal after scandal. But if someone pinned me down and asked me to bet on a bank, right now I'd be backing this dark horse.

Tim graduated with a history degree from Cambridge University in 1989 and, after a year of travelling, joined the financial services firm Ernst and Young in 1990, qualifying as a chartered accountant in 1994.

He then moved into financial markets training, designing and running a variety of courses at graduate level and beyond for a range of organisations including the Securities and Investment Institute and UBS. He joined MoneyWeek in 2007.