The Financial sector has traditionally offered slow and steady earnings growth complemented by rising dividends.  Perhaps not exciting stocks but consistent and steady.

Banks primarily make a profit between the interest they collect on loans and the interest they payout on deposits.  In general, and over extended periods, the interest rate on loans should be similar to peer banks due to competition for borrowers.  The competitive advantage lies on the liability side of the balance sheet in the interest rates paid on deposits.  

In a community like Stark County, if a particular bank has a lot of branches near your home and work, you’ll probably bank there due to convenience.  Banks hope the convenience of their branches will outweigh the lower interest rate paid on their deposits.  Imagine if you were comparing all the banks across the country and some banks could consistently pay 25% less interest on deposits.  Those slight savings for the banks on billions of deposits result in a significant difference in profit!

Financial institutions aim to make “sticky” customers by offering other related services such as fraud protection, credit cards, convenience apps for phones, investments, insurance, etc.  All these services are convenient and often initially attractively priced to keep you a long-term customer.

When analyzing banks, the geography of their branches or “footprint,” is a key differentiator.  A well-run bank should be able to maintain and grow market share in line with the underlying local economy.  For example, if the underlying economy is growing at 4% versus 1% the faster-growing branch footprint will result in more loan and deposit growth.

Truist Financial (TFC), which was the result of a merger of Suntrust and BB&T in 2019 is a notable example of such a bank.  The footprint from the merger now stretches through the lower end of the northeast down the coast through Florida.  The population growth within their branch footprint is expected to be one of the fastest through 2022-2027.

Truist Financial consistently ranks as a leader in market share in each of these geographies providing visibility into future growth.

These unique competitive advantages have resulted in peer-leading returns on tangible equity and operating efficiency which facilitates considerable cash generation.  Benefitting shareholders with growing dividends and earnings per share.

Sources: Company reports and presentations, Factset

Beese Fulmer Private Wealth Management was founded in 1980 and is one of Stark County’s oldest and largest investment management firms.  The company serves high-net-worth individuals, families, and non-profits, and has been ranked as one of the largest money managers in Northeast Ohio.