Several years out of the financial crisis, we screened for financial stocks who might handle a crash if it happened again today.
If you haven't read former Treasury Secretary Hank Paulson's first-hand account of the financial crisis - you should consider reading it now. And not just because he was the orchestrator of the Troubled Asset Relief Program. Paulson also has a deep understanding of how one bank's failure nearly brought down the entire system. While the crisis affected all of us, this guy lived it, from the moment he first realized a lack of transparency to when he finally convinced lawmakers to approve a controversial, highly unpopular bailout.
When he first briefed then-President Bush about the possibilities of a financial crisis in 2006, Paulson was already concerned about over-the-counter derivatives and the size of certain hedge funds. However, when President Bush asked him what would be the straw that broke the horse's back, so to speak, it was still too early to tell. It wasn't until the French Government began freezing funds in its biggest bank, BNP Paribas (OTC:BNPQY), that he realized what would bring the system down - subprime mortgages. Subprime mortgages are mortgages that are given to people with credit ratings below 600.
To compensate themselves for the risk, banks charge higher interests on these loans than they do on others. Pre-financial crisis, these mortgages were "sliced and diced" and packaged alongside other securities (to make them more lucrative) and then sold around the world. Every aspect of the system ended up tied to these bad loans that were unlikely to get paid back. A number of extremely old and reputable banks - Lehman Brothers, Bear Sterns, Merrill Lynch - didn't have the capital they needed to cover their losses by investing in these securities. A massive capital injection, accepted by troubled banks and healthy ones, was the only way to restore confidence in the market.
Years later we've learned a lot from the crisis. We have the congressional oversight panel to oversee how bailouts are administered. We have Dodd-Frank, the bill passed in 2010 which adds new transparency and capital requirements to our banking system, and does more to protect consumers from taking on unaffordable loans. However, there were still claims of major firms misleading clients as late as 2010 - such as the case involving Fabrice Tourre, a Goldman Sachs (GS) banker found guilty of misleading investors this summer.
Everything is 20/20 in hindsight, and with all that in mind, we decided to run a screen for financial stocks that exhibit good governance, and might be well placed to weather another financial storm. First we looked at our partner CSRHub's governance ratings, which examine a company's board, ethics, and transparency and assign a score based out of 100. We limited our results to financial companies with a governance score of 50 or higher.
Next we wanted to make sure that these stocks were well-capitalized, so we limited our results to those with healthy long term debt to equity ratios (LTDebt/Eq) - to make sure they weren't financing all of their profits with borrowed money. Debt to equity ratios vary across industries, but in this case we looked for ratios below 0.4. For reference, the LTDebt/Eq ratio for the entire finance sector is 1.18.
We were left with four companies on our list.
Click on the interactive chart to see data over time.
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Can these ethical companies still earn profits without borrowing money?
1.The Travelers Companies, Inc. (TRV, Earnings, Analysts, Financials):Provides various commercial and personal property and casualty insurance products and services to businesses, government units, associations, and individuals primarily in the United States. Market cap at $31.47B, most recent closing price at $83.73.
Corporate Governance: 63/100
2.MetLife, Inc. (MET, Earnings, Analysts, Financials):Provides insurance, annuities, and employee benefit programs primarily in the United States, Japan, Latin America, the Asia Pacific, Europe, and the Middle East. Market cap at $54.4B, most recent closing price at $49.55.
Corporate Governance: 57/100
3.The Allstate Corporation (ALL, Earnings, Analysts, Financials):Engages in the personal property and casualty insurance, life insurance, retirement, and investment products businesses primarily in the United States. Market cap at $23.47B, most recent closing price at $50.11.
Corporate Governance: 64/100
4.Wells Fargo & Company (WFC, Earnings, Analysts, Financials):Provides retail, commercial, and corporate banking services primarily in the United States. Market cap at $225.45B, most recent closing price at $42.50.
Corporate Governance: 50/100
(List compiled by James Dennin. Corporate Governance scores sourced from CSR Hub, analyst ratings sourced from Zacks Investment Research. All other data sourced from Finviz.)
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Dig Deeper: Access Company Snapshots, Charts, FilingsThe Travelers Companies, Inc.(TRV, Chart, Download SEC Filings) MetLife, Inc.(MET, Chart, Download SEC Filings) The Allstate Corporation(ALL, Chart, Download SEC Filings) Wells Fargo & Company(WFC, Chart, Download SEC Filings)
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