More Than Wal-Mart Savings & Loan

By Gregory S. Davis | February 22, 2006 AAA

Wal-Mart (WMT) has applied to form an industrialized loan corporation (ILC) in the state of Utah to handle credit card processing. Wal-Mart (WMT) executives claim their main desire is to mitigate millions of dollars spent on processing the 140 million credit, debit and electronic payments it handles monthly. Small community banks fear that Wal-Mart (WMT), who has a knack for squeezing costs out of operations and offering cut rate prices, could force many of them out of the banking business. Former Chairman of the Federal Reserve, Alan Greenspan, cites the potential of a failing Wal-Mart (WMT) ILC as placing a heavy burden on the Federal Deposit Insurance Corporation (FDIC) Fund set aside for bailing out insured financial institutions. Investors should also see the importance of studying companies that stand to benefit from Wal-Mart's (WMT) current financial service offerings while not being overly unnerved by Wal-Mart's ILC application.

Wal-Mart (WMT) has approximately 45 in-store SunTrust (STI) bank branches within its doors, co-branded as Wal-Mart (WMT) Money Centers by SunTrust (STI). The goal for this year is to roll out an additional 55 SunTrust (STI) branches in Wal-Mart (WMT) stores. Atlanta based SunTrust Bank, one of the fastest growing banks in the Southeast, reported 4th quarter Net Income of $514 million, up 13% from a year ago. Net Income was driven primarily by increases in its mortgage loan business. SunTrust (STI) stock trades in the $70 dollar range while offering a 3.4% dividend.

Other financial services currently offered by Wal-Mart (WMT) in English and Spanish include money transfers, payroll check cashing, money orders and a new Debit/ATM Card issued by GE Money Bank, a subsidiary of General Electric (GE). Western Union, a subsidiary of First Data Corp (FDC), charges $14.99 to send money to Mexico. Wal-Mart's (WMT) wire transfer services cost just over $9 for the same service. Wal-Mart's (WMT) current wire transfer partner is the global money transfer service provider, MoneyGram International Inc., (MGI). MoneyGram (MGI) recently reported strong 4th quarter results as global fund transfers reported revenues of $175 million, up 21%
over a year ago. For 2005, MoneyGram (MGI) reported profit of $113 million on
revenue of $971.2 million.

It's estimated that $230 billion of funds were sent in 2005 from workers in developing countries to friends and loved ones in their respective homelands. With such a huge market, FDC has made plans to make Western Union into its own company. Western Union is the #1 player in the funds transfer industry, followed by Minneapolis based MoneyGram. Since MoneyGram (MGI) went public in mid-2004, the stock has been on a steady increase from $17 to its current $27 price level.

While the majority of the 57 active ILCs in the U.S. are owned by financial services firms like Merrill Lynch (MER) and American Express (AXP), there are non-financial companies who also have ILCs, including GE Capital Finance and GMAC Commercial Mortgage Bank, a unit of General Motors (GM). In total, ILCs in the U.S. have assets valued at over $140 billion, which still represents less than 3% of insured funds for all Banks.

Yes, Wal-Mart (WMT) can deliver customers. With more than 3,000 stores nationwide Wal-Mart (WMT) serves nearly 100 million visitors or approximately 1/3 of the US population every week. Still, there is no guarantee that shoppers will turn to Wal-Mart for their financial service needs, even if they had the legal authority to operate as a full service bank.

In the coming weeks the FDIC will ultimately decide if Wal-Mart is granted permission to launch its ILC in a public hearing. The short-term play is to investigate the companies such as General Electric (GE), MoneyGram (MGI) and SunTrust Bank (STI) who stand to profit from Wal-Mart's and other retailers' forays into financial services while keeping an eye out for the impact of a possible Wal-Mart Savings and Loan in the future.

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