@chasesfish I agree with your premise and reasoning overall. I view bank performance as essentially a reflection of US GDP growth and their valuations have lagged somewhat behind that GDP performance over the last 3-4 years. Also, there are alot of regulatory actions taken after the last recession that made them inherently less risky (this applies much more to the non-money-center banks). HVCRE rules are the big thing here, along with a clampdown on risky energy lending. However, I have a few questions regarding the specific banks you've mentioned.
I agree with you that the only money center banks worth thinking about are JPM and BofA. US Bank is approaching that money-center territory in terms of size, and is probably a better option if (like me) you understand corporate, middle-market, retail, and ancillary corporate banking, but don't understand the more esoteric investment banking stuff that JPM and BofA are involved in.
I agree on all of your regional bank picks except Regions. In my view, Regions is virtually the same animal as Comerica, without the unusual Michigan/Texas footprint. Does Regions have an identity? Is management any better than it was when they were toasted during the last recession? They are cheap...but I don't know of any other exciting aspects to the bank.
I also don't really agree on Capital One. The credit card play is there, but their middle-market real estate and C&I business has performed very well for a long period of time. They've also been pretty selective on what major markets they progress into and their core market of Northern Virginia is poised to continue to thrive for a variety of reasons. Although there may be better pure play regional banks for a bet on the Northern Virginia economy.
I agree wholeheartedly on 5/3 and Frost. Great long-term performances, growth oriented without excessive balance sheet risk. These are two of the industry leaders IMO. Best in class management as well.
Regarding your comment on Bank of NY Mellon. I view them as having an enormous amount of their franchise value tied up in their fiduciary responsibilities, which essentially keeps credit risk off of their balance sheets. This is in the form of them acting as collateral fiduciaries for large commercial banking transactions (holding and monitoring non-real estate collateral), acting as paying agent for large bond transactions (municipal and corporate), and any other fiduciary responsibilities they can get their hands on. So they end up with a massive amount of fee income relative to their loan book, which makes them the closest thing to an asset-light bank that you can probably find. The reason I am curious on your thesis about Mellon is that (from what I understand), PNC has basically been pushing in this direction over the last decade - they are trying to gobble up much of that same fee/intermediary business that Mellon has been effective at gathering. Curious what your thoughts are on this? State Street and Northern Trust are others that I have started following that operate in this vein, but I know less about them and am not comfortable recommending.
A couple of other institutions you might want to take a look at that fit the Frost or 5/3 mold are:
- M&T Bank - headquartered in Buffalo. They don't have much of a presence in Texas, so they probably don't meet the criteria of you having some personal knowledge of them. But very well run and stable.
- BB&T, First Citizens - These would represent two of the most dominant banks in the Carolinas/Tennessee/Northern Georgia area (with the primary emphasis here being on North Carolina, and a secondary emphasis being on the Research Triangle area). I would predict that North Carolina (along with Texas and a few other smaller pockets across the country) will have one of the more dynamic regional economies over the next 20-year period. Your pick of Sun Trust also captures some of this geography, as I believe the favorable business climate in this area actually extends into Tennessee and Northern Georgia. Re: BB&T going forward - they've got good management and typically have had a longer-term viewpoint. Their business model has been growth through bolt on acquisitions. This worked for a long time because they were gobbling up small institutions to reach the very large size they're at now. The issue currently is that any acquisition they undertake that turns the needle has to be a fairly sizable regional bank and 1) their aren't that many of them, 2) most of them can do what BB&T does in a more nimble manner, so why should their shareholders think that BB&T's purchase price is any better than what the existing regional bank can achieve, and 3) many of the bank's they'd need to acquire are competitively in the market for acquisitions as well. I think they will have a tough time growing, but time will tell. They are stable from an asset quality standpoint though and they have a massive presence in North Carolina, which is a positive.
- Columbia Bank, Umpqua, Banner, Washington Federal - Same as the one above, with the regional play with a smattering of decently sized banks with alot of exposure to Washington State (on both sides of the Cascades...each side has its own unique upsides), western Oregon, and Idaho. Of these, Columbia, Banner, and WaFed are fairly stable and Umpqua is hyper-agressive.
- CIT Group - I don't know alot about them, other than (I think) they have a big focus on middle-market commercial banking and I've read several write-ups on different forums about why they have a good platform. Again, I don't know much but others speak highly.
- Silicon Valley Bank - If you are looking for something different to balance the stability of the rest of your portfolio. I would wait and see how 2019 unfolds for tech stocks because SVB's performance will always be closely tied to NASDAQ performance. As evidence of this, they've lost 41% of their market cap in since they peaked at $323/share in April 2018. I would also wait to see how the big VC firms perform in 2019 (a couple of ways to follow this is through tracking SoftBank and Kinnevik's stocks). But SVB has, IMO, some of the best management in the banking industry and is focusing on compounding their share value rather than dividend returns. They are the one bank most likely to capture valuation gains in excess of the US GDP, but also obviously has some risks that most other banks don't.
Thanks for starting this thread! Very interesting topic and one that finally convinced me to stop lurking and create a login for the forums.