Erin Davis: We recently refined our bank-moat methodology to include a more detailed analysis of the banking systems in which banks operate and the "moatiness" of their fee-earning businesses.
As a result, we upgraded the moat ratings of eight banks that we cover: Wells Fargo (WFC) and U.S. Bancorp (USB) in the United States; Svenska Handelsbanken (SVNLY) in Sweden; Toronto-Dominion (TD), Bank of Nova Scotia (BNS), and Royal Bank (RY) in Canada; and Banco Santander (SAN) and Banco de Chile (BCH) in Chile. Many of these--including U.S. Bancorp, Toronto-Dominion, and Santander Chile--are trading at attractive discounts to our fair value estimates.
It might be surprising to some investors that our new wide-moat banks include so many non-U.S. banks. That's largely a result of the careful look we've taken at the environment in which banks operate, including macroeconomic, competitive, regulatory, and political factors. We think that some of the less-well-known banking systems, such as that of Chile, are actually more likely to produce sustainable excess returns, because of good regulation and high market concentration, versus the U.S., which features a more competitive marketplace and an overlapping labyrinth of regulation.
It's interesting to note that size doesn't always equal moatiness. Some of the moatier banks we cover, like U.S. Bancorp, are straightforward regional banks. In contrast, we recently downgraded the moat of Deutsche Bank (DB) because none of its many components are moaty enough to outweigh the difficulty of properly managing the bank, and it seems unlikely to produce excess returns in the long run.
We prefer banks that are either fairly simple or that have businesses that share clear synergies--like retail banking and wealth management.