Banks with Competitive Advantages Show Resilience

The term “economic moat” describes a company’s ability to maintain its competitive advantages and defend long-term profitability. Morningstar analysts joined the recent VanEck webinar to discuss how financial firms with strong “moats” are faring through turmoil in the banking industry.

Banks Are Put to the Test

The turmoil in the banking industry, initiated by the collapse of Silicon Valley Bank (SVB), has raised concerns about funding costs and the future profitability of banks. While the banking industry has stabilized, investors remain cautious and have become increasingly selective. In this environment of heightened uncertainty, Morningstar believes banks with well-established economic moats will prove to be more resilient to market fluctuations and funding cost pressures. Their competitive advantages should enable them to maintain profitability, even as their peers struggle. Below, we take a closer look at two bank portfolio holdings in the VanEck Morningstar Wide Moat ETF (MOAT^®) and the VanEck Morningstar SMID Moat ETF.

Comerica

While Comerica’s¹ business model relies heavily on interest rates, Morningstar believes the bank’s superior deposit costs and business relationships set the stock up for long-term success through a market cycle. Although the stock may suffer from broader banking concerns in the short term, they believe the company’s strong cost advantages will help it outperform over the long term. In Morningstar’s view, the recent pullback in the stock pushed the discount even farther below their estimate for fair value. Comerica was added to the Morningstar US Small-Mid Cap Moat Focus Index in December 2022 and scaled up in March 2023.

Comerica Inc. 1 Year Price and Fair Value

US Bancorp

US Bancorp² is the largest non-global systemically important bank in the United States. Few domestic competitors can match its operating efficiency and returns on equity over the past 15 years. US Bancorp’s diverse product lineup increases switching costs by locking customers into its unique ecosystem and making it expensive to move. Like Comerica, US Bancorp’s stock has pulled back with other banks and trades significantly below Morningstar’s estimate for fair value. US Bancorp was added to the Morningstar Wide Moat Focus Index in December 2022 and scaled up in March 2023.

US Bancorp 1 Year Price and Fair Value

¹ Comerica, Inc. is 0.87% of net assets for the VanEck Morningstar SMID Moat ETF (SMOT) as of 4/27/2023.

² US Bancorp is 1.74% of net assets of the VanEck Morningstar Wide Moat ETF (MOAT) as of 4/27/2023.