For nearly a decade, the U.S. banking industry has become the punching bag in American business. Some of the blame is fully warranted, while at other times the U.S. banking system was an easy scapegoat. I firmly believe our financial institutions provide a vastly greater benefit to our nation and society above and beyond the risks they may pose. And yes, I include the big banks that are viewed by some as "too big to fail."
Community and regional banks provide an indispensable service to the areas they serve. And the major banks provide services to the nation and global economy that are also indispensable, including supporting the smaller banks during time of need, which happened during the financial crisis. Banks like JPMorgan (JPM) stepped up to support regional and community banks when options were slim.
But when financial institutions screw up, the consequences can be painful, as we saw not only in 2008 but throughout other periods in our history, like the savings-and-loan crisis a few decades ago. And during the years that I have observed, studied and researched banks, I've concluded that there is a key determinant into driving value at banks. Trust.
While trust is paramount with all businesses, it holds a special place in the financial sector because the consequences have longer tentacles with financial institutions. When a restaurant violates its consumer trust due to food-borne illnesses, the problem and consequences can usually be contained fairly quickly. A company like Coca-Cola (KO) can have a grossly incompetent executive and still end up fine. When a financial institution violates trust, the consequences can be disastrous and financially harmful for years and years.
If you consider the housing and financial crisis, the problems like Countrywide were a result of lax management and an abuse of fiduciary obligation.
That's why I'm a big fan of banks like Towne Bank (TOWN) , which has been diligent in creating a culture of trust and value over the years. The net result has been a bank that has created value for its customers and shareholders. Since 1999, the stock is up nearly fourfold.
Banks are powerful, essential and very attractive businesses. They have an ability to make a lot of money through the use of leverage and other means. Banks can make for very attractive long-term investments. Or they can be painful investments. The intangible element of quality management and trust is by far, in my view, the most important consideration in investing in any financial institution.