Charles Schwab Corp., despite a sharp drop in the value of its stock in the latter half of 2000, remains a winner--the winner, in fact. It came out No. 1 on a U.S. Banker ranking of price-to-book-value ratios of the nation's 100 largest financial companies.Schwab's price of $26.06 on Jan. 2, 2001, was almost 8.9 times its book value of $2.92 at the end of the third quarter of 2000--the highest multiple of the group.
Two companies came close: USA Education Inc. of Reston, VA, the holding company for Sallie Mae, which ranked No. 2, and San Francisco-based Providian Financial Corp., which ranked No. 3. Sallie Mae was trading at 8.8 times book, and Providian, 8.4.

The winners in the price-to-book category closely followed U.S. Banker's performance rankings last May, which were based on returns on equity over one-, three- and five-year periods. In that ranking, Providian came out No. 1, followed by San Francisco's Schwab and New York's Morgan Stanley Dean Witter & Co.

In the current ranking, despite spectacular earnings and a strong stock price, Morgan Stanley placed fairly far down the list, at No. 18.

The ranking was based on each company's book value at the end of the third quarter (except where otherwise noted) and its market price at the close of business Jan. 1, 2001. The raw data was supplied by SNL Securities.

A number of trends are apparent from the ranking. Financial companies that focus on processing and those that securitize large portions of their portfolios, such as credit card companies, tend to perform better than most.

At the other end of the spectrum are companies that have gotten themselves into dire trouble.

The FINOVA Group, whose stock was selling at just 5% of its stated third-quarter book value, came in last. That was no surprise. Only a few days before Christmas, the financially ailing commercial lender, based in Scotsdale, AZ, indicated that it might file for bankruptcy protection. In November, FINOVA suspended its dividend after reporting a third-quarter loss of $274.1 million, or $4.49 a share.

Aetna Inc. of Hartford, CT, was another big loser, ranking 99th. Its stock was selling at a bit more than half its book value. The once-big insurer, which now specializes in health care, sold most of its financial services businesses to the Dutch ING Group last year.

Overall, compared with a year ago, the multiples seem gloomy because the price of many financial stocks dropped badly in the last half of the year (except for commercial banks, which bucked the overall market trend, and rose).

But from a longer-term historical view, these remain the best of times. In the late 1980s and early 1990s, few banks were selling at or above book value. From that perspective, recent performance is glowing. Of the 100 companies, 93 were selling above book value.

From a very near-term perspective, the world does not look as rosy. Schwab, for example, which still ranks No. 1, saw its stock price plummet from a high of $44.75 in March of 2000, to around $25 last month. That, of course, reduces its price-to-book multiple. The question is which price is more rational, the $44 of March or the $25 of January? (See cover story.)

The drop in Schwab's price reflected the general decline in the prices of online brokerage firm stocks. Schwab's shares were hit hard even though it has by far the most successful online brokerage business. The company also is a growing factor in the wealth management business, a sector that has been holding up fairly well.

But unlike the Morgan Stanleys and Merrill Lynches, Schwab is not an investment bank. That sector's fortunes have been hurt with the downturn in initial public offerings and other capital markets activities.

Merrill Lynch & Co., based in New York, was fairly far down the list, ranking 28th, while Lehman Brothers Holdings, a pure play investment banker, ranked 45th. New York-based Lehman's book value was as of Aug. 31, 2000, not Sept. 30.

Taking the No. 2 spot was USA Education Inc., the holding company for Sallie Mae, which specializes in student loans.

Unlike most other top-caliber companies, little is heard from or about Sallie Mae. Maybe no news means good news. The problem--if it is a problem--is that Sallie Mae is in a niche of its own. Its biggest competitor is the federal government, which is the nation's biggest direct lender to students. The next-largest private lender in that market is the Student Loan Corp., an affiliate of Citigroup, so therefore it has no publicly traded stock. "We're an industry of one," says Jack Remondi, senior vice president of USA Education.

USA Education is actually the old SLM Holding Corp., whose principal subsidiary is Sallie Mae. In fact, the group's stock symbol remains SLM.

Sallie Mae was formed in 1972 as a federally chartered, stockholder-owned company, a so-called GSE, or government-sponsored enterprise. In 1997, it was reorganized as SLM Holding Corp., a private company publicly traded on the New York Stock Exchange.

The company, which controls about a third of the student loan market, began expanding aggressively in 1999. In that year it bought Nellie Mae, which increased Sallie Mae's loan portfolio and fortified its loan origination business. In 2000, it acquired USA Group and adopted its name. The acquisition added further to Sallie Mae's loan portfolio, but also gave it an outsourcing business in which it provides services to other student lenders, many of them banks.

Unlike most other companies, 2000 was a fine year for USA Group. Although its stock declined sharply in the first few months of the year, it climbed smartly from April through year-end. SLM was selling at around $30 at the bottom of the March trough, but ended the year nearing $80 a share.

"What we bring to the table is quality," says Remondi. Indeed, Sallie Mae was just what investors seemed to be looking for last year as they began worrying about higher interest rates, recessions and mushrooming portfolios of bad loans.

In contrast to banks and other lenders, such as FINOVA, some 97% of Sallie Mae's assets are guaranteed by the federal government. "There's a predictable earnings flow and no great risk," says Remondi. "That's what people want in this kind of environment."
The fact that the vast majority of its loans are guaranteed by the government also means that its equity can be kept at very low levels--less than 2%, according to Remondi. That, of course, helps the company's return on equity, which in turn, boosts its stock price. And that, of course, bolsters its price-to-book value.

Also helping Sallie Mae's price-to-book value is the fact that it securitizes a large portion of its portfolio. Last year, for example, the $46 billion-asset company securitized about $8 billion in loans.

Other top scorers in this year's ranking are also big securitizers.

Among them are Providian; Capital One, which ranked No. 5; Synovus, No. 12, and MBNA, No. 13. All, of course, are leading credit card issuers or processors.

These companies, generally considered to be well run, have continued to attract investors despite the widespread fear of an incipient recession. A recession, of course, could lead to growing delinquencies and defaults among cardholders.

Perhaps such fears should be greatest for companies that focus on lending to subprime borrowers. But Providian and Capital One, which fit into that category, continued to lead the pack.

"Our goal is to provide value to our investors," says David Petrini, Providian's chief financial officer. "If we can provide our customer base with value, we can provide value to our shareholders, too."

Financial companies that specialize in processing also continued to score extremely well. Chicago's Northern Trust Corp. took the No. 4 spot; Bank of New York, No. 6; and Boston's State Street Corp., No. 7.

The two government-sponsored organizations, the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corp. (Freddie Mac), did relatively well, but not spectacularly. They ranked 14th and 15th. Both performed well through most of 2000, but their shares began dropping sharply at the beginning of 2001.

Banks in the mid-West and mid-South were the best performers among the nation's pure commercial banks. Ohio's Fifth Third Bancorp led the group, coming in 10th, followed by National Commercial Bancorp. of Memphis, which placed 20th. Old Kent Financial Corp. of Michigan, which is being acquired by Fifth Third, came in 22nd.

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