Author Topic: Bank Stocks  (Read 21994 times)

chasesfish

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Re: Bank Stocks
« Reply #100 on: June 28, 2019, 06:45:34 AM »
The CCAR results are in:

https://www.americanbanker.com/news/banks-clear-ccar-stress-test-though-jpmorgan-chase-capital-one-barely

So far:

JPM is increasing dividend to $.90/qtr (from $.80) and authorized a $29.4B buyback.

WFC is increasing dividend to $.51/qtr (from $.45) and authorized a $23.1B buyback.

USB is increasing dividend to $.42/qtr (13.5% increasing) and authorized a $3B buyback.

Pretty excited.  The regionals I own seem to be deferring their dividend announcement until the board meetings in July.   This will be pretty predictable, 35-45% payout ratios with the rest going to buybacks.  As long as we don't get an outright real estate collapse, if credit losses whack earnings, the banks can absorb a 50% reduction in earnings without having to cut the dividend, just slow the buyback program.    That seems to be the fed's goal, the bailouts show up when banks have to raise capital and the stocks are in the toilet due to a dividend cut.

habaneroNorway

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Re: Bank Stocks
« Reply #101 on: July 02, 2019, 12:08:42 PM »
I own some bank stocks - that's pretty much the only single-name stuff I own. They are local domestic savings banks which has limited growth potential and are quite low risk (loan portfolio very mortgage-heavy in mostly low-cost areas). They have a handsome dividend payout ratio (5-9% yield generally, tax-sheltered over here*) and some time back the stocks could be bought for dirt cheap for reasons I'm not going into so I've also had some handsome capital appreciation on those investments. I view it as close to a very high-yielding bank deposit. I am fully aware there are additional risks but those are not very big (nationwide housing collapse being pretty much the only thing that can go horribly wrong). Over here it's also much more difficult to declare personal bankrupcy and walk away from your mortgange than in the US so loan losses on mortganges are historically very, very, very low - even in the various crisises over the last decades. They are unsexy stocks not covered in the daily financial gossip, they are not part of any index and few analysts cover them and the stocks might or might not really go anywhere, but the dividend is handsome. Some of the names are quite illiquid but the daily trading volumes easily covers my limited positions. Not something I bought to hope to make a quick buck, but as a nice high-yielding investment with low volatility. Then again, past performance is no guarantee for future returns.

*) dividends are generally higher than in the US as there are less tax incentives for buybacks over paying out as dividends. The main domestic index has a dividend yield of around 4.25% even with stock prices not that far from all-time-high.
« Last Edit: July 02, 2019, 12:19:34 PM by habaneroNorway »

chasesfish

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Re: Bank Stocks
« Reply #102 on: July 04, 2019, 06:44:00 AM »
Those are really nice statistics @habaneroNorway
The US really messed up home finance 40 years ago by moving it out of the banks via these government sponsored entities.   Now Americans think its a birthright to be able to get a 30 year fixed rate mortgage.   Our banks primarily hold commercial loans - they can go bad a lot quicker than house loans!

My biggest holding is similar to what you describe, the largest Bank in the state of Hawaii.   Nice boring bank with limited growth potential

bwall

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Re: Bank Stocks
« Reply #103 on: July 04, 2019, 08:43:54 AM »
I own some bank stocks - that's pretty much the only single-name stuff I own. They are local domestic savings banks which has limited growth potential and are quite low risk (loan portfolio very mortgage-heavy in mostly low-cost areas). They have a handsome dividend payout ratio (5-9% yield generally, tax-sheltered over here*)

Could you please be so kind as to provide some name of high yielding, quality Norwegian banks? With a $1trillion sovereign wealth fund an zero government debt (is that really true? Can you confirm?), I'd love to invest in Norway and a bank seems like a great way to do it. The closest thing to Fort Knox you'll find in Europe, they haven't bothered with the Baltics and thus avoided the money laundering scandal like the Swedes and Danes.

habaneroNorway

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Re: Bank Stocks
« Reply #104 on: July 04, 2019, 10:27:50 AM »

With a $1trillion sovereign wealth fund an zero government debt (is that really true? Can you confirm?)

Yes and no. Norway has government debt but its mainly because its nice to have a risk-free yield curve for reference purposes, there is demand for the securites from various accounts and short-term debt is used to to manage the government's liquidity as there is timing gap between big incomes (tax, VAT payments, oil tax) and expenses which are fairly constant. It is also used to fund some state-run "banks" (for student loans etc). Norway does run a healthy budget surplus so there is no need to borrow per se. But with liquid assets many, many times the debt and our own currency the default risk is pretty much as low as it gets.

As for bank picks I'm not gonna pretend to be an expert and hence abstain - I own a small basket of the larger local savings banks. The local savings banks are quite peculiar type of equity for various reasons and its bit more complex than usual to calculate price-to-book ratio for those  banks. The country's biggest lender by far is DNB with a liquid stock, but as for the direct yield it's around 4.5% at mom (results out next week btw). That is also a full-fledged bank with lots of commercial lending and an investment bank arm, life insurance, asset management and so on. DNB'sstock performance has been spectacular since the financial crisis (total return > 20% annually since the bottom in 2009).

Norway is a bit like Canada, (almost) whatever equity you buy here it also carries a quite big correlation to the oil price as it has a big influence on the overall economy. If you want to play around there is an ETF on the main index which should be possible to trade (fee 0.20% which is the going rate for index funds here). The market ain't cheap, however. The long-term performance over the last couple of years has been roughly on par with the S&P 500 - so much, much better than the rest of Europe. The local currency is also weak vs EUR and USD based on historical rates, but that does not mean its gonna revert. Also remember that as a foreign investor you are taking outright FX risk.

The sovereign wealth fund has exactly zero investments in Norway btw. Its part of the mandate.
« Last Edit: July 04, 2019, 10:46:01 AM by habaneroNorway »

bwall

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Re: Bank Stocks
« Reply #105 on: July 04, 2019, 11:21:15 PM »
Fascinating. Thanks for the info.

talltexan

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Re: Bank Stocks
« Reply #106 on: July 10, 2019, 11:57:57 AM »
I think many Americans forget how small Canada is relative to them because we're used to looking at a map, in which the two countries are approximately the same size.

The economies of Canada and Texas are approximately the same amount of output.

Norway has about 25% the population of Canada, perhaps less.

That's why foreign exchange risk is so important to international investors.x

Fishindude

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Re: Bank Stocks
« Reply #107 on: July 10, 2019, 12:45:02 PM »
I own a pretty big chunk of a well run, small local bank I am quite familiar with.   It's been a great investment, stock value has almost doubled since my initial buy ins, dividends have been a consistent 4%, and twice in last few years they've done special one time dividends approx. 5-7X their normal quarterly dividends.    They'll buy stock back just about anytime someone wants to sell at book value too.

chasesfish

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Re: Bank Stocks
« Reply #108 on: July 10, 2019, 02:59:08 PM »
One update, I sold down a little bit of my RF and Fifth Third today.  After the nice run through yesterday, I set some limit orders.

I posted a complete list of my holdings earlier this month that discloses all my financial sector holdings too.

ctuser1

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Re: Bank Stocks
« Reply #109 on: July 10, 2019, 03:38:55 PM »
Many/most small banks look good in terms of valuation. I'd speculate, however, that they have a big headwind in terms of their ability to compete on IT spend with the bigger banks.

Banking is an incredibly data rich, and data hungry industry. The uptake of big-data and AI driven innovation in banking has been much slower compared to other industries because how heavily regulated banks are, and how difficult it is for the FinTech firms to skirt around regulations for any financial innovation they may offer.

This is changing, slowly but surely. Erica from BofA is just a start. All the big banks have made major push in technology (a big one I know even calls itself a "Technology Company" now). The smaller banks will likely not be able to compete on this. There are many areas of banking running on half a century old system and only the bigger ones will have any shot at modernizing all these stuff to be able to compete and yet satisfy any regulatory requirements!!

chasesfish

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Re: Bank Stocks
« Reply #110 on: July 10, 2019, 04:48:24 PM »
@ctuser1 - You make a good point on IT, but some would argue the smaller banks actually have an advantage.  They all can buy "off the shelf" software from a couple of solid industry providers.  The big regionals and nationals all have proprietary systems that don't really play well with others. 

I've seen it be a smaller subscription based cost for small banks that can be outsourced while the big banks have to spend hundreds of millions internally on systems.

Where the Big 4 have a huge advantage is advertising scale in consumer banking.   JPM, Chase, Citi, and BofA are all at least 4x the size of their next largest competitor and can just carpetbomb a market with consumer advertising and promotions to acquire clients.  As hard as PNC, USB, and the new STI/BBT folks try to compete, they are so far behind its not going to work.  They'll have to stick to being commercial banks.


ctuser1

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Re: Bank Stocks
« Reply #111 on: July 10, 2019, 05:20:49 PM »
@ctuser1 - You make a good point on IT, but some would argue the smaller banks actually have an advantage.  They all can buy "off the shelf" software from a couple of solid industry providers.  The big regionals and nationals all have proprietary systems that don't really play well with others. 

So far, it seems you are at a disadvantage if you are looking to buy AI systems off the shelf!

Vendors simply won't have the access to the mass-scale data required to train their systems and even the hardware setup cost is not an easy thing unless you have the mega scale.

Of course, things may quickly change and future is difficult to predict. Who knows? Maybe 20 years down only Facebook will be a bank and all our accounts will hold Libra!!

CorpRaider

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Re: Bank Stocks
« Reply #112 on: July 11, 2019, 06:38:19 AM »
I read some article recently about how one of the major tech suppliers to the smaller banks is really laying the wood to them.  Maybe it was in American banker?  I've been intending to download some of the smaller banks apps to see how crappy they are.  One reason I own zero FCNCA is because of the reviews of their app in the app store.  I should probably just shut up and buy a crapload of Wells.

Fishindude

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Re: Bank Stocks
« Reply #113 on: July 11, 2019, 07:53:28 AM »
Many/most small banks look good in terms of valuation. I'd speculate, however, that they have a big headwind in terms of their ability to compete on IT spend with the bigger banks.

Banking is an incredibly data rich, and data hungry industry. The uptake of big-data and AI driven innovation in banking has been much slower compared to other industries because how heavily regulated banks are, and how difficult it is for the FinTech firms to skirt around regulations for any financial innovation they may offer.

This is changing, slowly but surely. Erica from BofA is just a start. All the big banks have made major push in technology (a big one I know even calls itself a "Technology Company" now). The smaller banks will likely not be able to compete on this. There are many areas of banking running on half a century old system and only the bigger ones will have any shot at modernizing all these stuff to be able to compete and yet satisfy any regulatory requirements!!

Not always true.
Some small banks are very well ran, lean and mean, keep up with technology and are quite profitable.

Many of the large banks make poor margins due to so many branch locations, etc. that are largely unprofitable.
Not much money in home loans anymore, some banks make it on fees, but the real heart and soul of banking is commercial lending.  If you can make enough good commercial loans, you can be quite profitable, and you don't need a brick and mortar branch building in a community to make commercial loans there.

habaneroNorway

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Re: Bank Stocks
« Reply #114 on: July 11, 2019, 08:59:36 AM »
I think one of the worst thing you can own is a small, regional bank which isn't happy with being a small, regional bank. That's normally a recipe for sloppy lending etc to gain market share. That might work fine for a while until it suddenly doesn't. If you want to see the same happening in size - just look at Deutsche Bank.

chasesfish

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Re: Bank Stocks
« Reply #115 on: July 14, 2019, 04:40:16 AM »
@Fishindude - Spot on.  The money is in commercial lending

ctuser1

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Re: Bank Stocks
« Reply #116 on: July 14, 2019, 05:38:44 PM »
Not much money in home loans anymore, some banks make it on fees, but the real heart and soul of banking is commercial lending.

This specific statement was a surprise to me. I always thought consumer banking was the more profitable segment of the banking lines of business for large banks, especially since 2008. So I decided to look it up!!

Two of the biggest representative banks are the Charlotte neighbours - BAC and WF.

1. WF
https://www08.wellsfargomedia.com/assets/pdf/about/investor-relations/earnings/fourth-quarter-2018-earnings.pdf
If you go to page 8 ("Business Segment Performance"), you will see that "consumer banking" is bigger in terms of profit - $3.1B instead of $2.67B.

2. BaC
https://www.investopedia.com/articles/investing/022816/bank-americas-4-most-profitable-lines-business-bac.asp
As of the last quarter in 2015, this article quotes "Consumer Banking: this line of business netted the company $1.8 billion in net income - over half of the company's overall net income for the quarter".

For the big banks, I've always thought the post-2008 period brought in strong performance from the consumer segment because they could pay such low interest rates for deposits. They simply don't have to compete with the market or anything. To add to this, deposits are considered Tier 1 capital - which is treated the most favorably by the regulators in the bank capital requirement rules. For commercial banking, they have to raise money from money markets and has no advantage in terms of cost of capital.

Cost of capital and interest income are probably the two biggest drivers of bank profits!! For regulatory reasons, the cost of capital is probably a more important lever because it is double/triple/multiple counted (Capital requirement, Collateral Requirements, KVA/CVA/FVA etc. etc. etc.) due to regulatory requirements!!

It's possible my data point is skewed and this is true for WF/BaC only because they *are* primarily consumer banks. Perhaps the picture looks different in banks that are primarily commercial banks. If so, please clarify!!

I ask because I am curious.
« Last Edit: July 14, 2019, 05:40:20 PM by ctuser1 »

chasesfish

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Re: Bank Stocks
« Reply #117 on: July 15, 2019, 10:12:22 AM »
@ctuser1 - Bofa, WF, and Chase are the dominate consumer banks.  They have the most customers to spread costs over and generate low cost deposits.  I won't speak to Citi, but they have a good retail franchise as well.  They're affectionately known as the Big 4.

I'm going to speak directly related to the institution I worked at, but going through ABA's banking school and having friends working elsewhere, I can say with some confidence this reporting is similar from bank to bank.

The "segment profitability" numbers they report has subjectivity.    Here are a few issues I've picked up on.

Transfer pricing:   The consumer segment profitability is primarily driven by consumer transaction deposits and fees.   The bank assigns an internal number to those deposits called "transfer pricing" and gives the P&L of the consumer bank credit for providing those deposits over to the commercial/corporate bank.    The commercial/corporate bank is primarily making the loans while the consumer bank provides a chunk of the funding.   The *only* bank I can think of that's different is Capital One, just because their commercial business dwarfs their consumer business and their executives think they are running a fintech company.  Transfer pricing is the first form of subjectivity, they are picking a number and crediting the consumer bank for loaning the funds over to be loaned out by the commercial bank.

So then you have your branches - They service both consumer and small business deposits.  Some banks lump small business into their retail bank while others don't.   A smaller business client is wildly profitable for a bank.  They tend to carry the highest transaction deposits relative to costs and even when you loan them money, they have the highest deposit balances relative to loans.   The bank I worked for allocated all of the branch cost to retail, which was insane.


All that being said, I've watched Bank of America stick to their model for the entire fifteen years I was in the industry.  1) Be the dominate consumer bank generating the lowest cost of funds  2) Loan those low cost funds out to the largest businesses in the country.

Whether we say they make their segment money through the low cost advantage on deposits or through the interest income earned on loans that they can do at a lower cost than others, they win either way.  I always admired a client of mine who thought the same thing in 2009 and put $500,000 in their stock.



frugal_c

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Re: Bank Stocks
« Reply #118 on: August 07, 2019, 10:37:41 PM »
Bank stocks are down right now and much more than the indices.  There is talk of permanently low interest rates, even negative interest rates and the effect on banks.  I am tempted to swim against the current but I wanted to get your opinion first fish chaser.  Are these bank stocks investable at lower rates?  Any in particular you like?

chasesfish

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Re: Bank Stocks
« Reply #119 on: August 08, 2019, 05:57:16 AM »
I bought around $60,000 worth over the last few days.   I already own a lot, so I setup a bunch of limit orders to hit as they fell in price and most of those orders executed yesterday. 

BAC, JPM, USB, and PNC are the safer ones in the sector but a little more expensive.  I'm long BAC and JPM

The regional banks carry more risk with lower interest rates but also are retiring stock quicker.   I'm long FITB, KEY, CFG, and RF in the regionals.

In non-bank but debt related news, I opened positions in XOM and AT&T this week.  They have a lot of debt and high dividends, lower rates will help AT&T and I don't see how China is going to effect people's use of the internet or cell phones.   

I'm at the point now that I'll sell down some of the bank stocks if I get a 10-15% rebound.   Their earnings are going flat or will decline slightly, but EPS will still rise nicely, at these PEs they are retiring 7-10% of their float a year.  Philip Morris did this successfully with a declining business for 20 years.
« Last Edit: August 08, 2019, 05:58:52 AM by chasesfish »

talltexan

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Re: Bank Stocks
« Reply #120 on: August 08, 2019, 06:33:15 AM »
In the intermediate term, banks make a profit from the yield curve. The dramatic drop in the ten-year treasury bond yield (1.6-ish percent yesterday) really hurts them, because they borrow at shorter-term rates, which are actually higher now.

In the intermediate term, Elizabeth Warren is a serious Presidential candidate; she will probably not win, but she could, and she hates banks.

chasesfish

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Re: Bank Stocks
« Reply #121 on: August 08, 2019, 07:13:45 AM »
In the intermediate term, banks make a profit from the yield curve. The dramatic drop in the ten-year treasury bond yield (1.6-ish percent yesterday) really hurts them, because they borrow at shorter-term rates, which are actually higher now.

In the intermediate term, Elizabeth Warren is a serious Presidential candidate; she will probably not win, but she could, and she hates banks.

Both reasons you can buy them for 9x earnings right now.

The banks don't take as much interest rate risk as they used to on the long end.  They usually loan variable, let the customer use interest rate swaps if the customer wants a fixed rate, and mainly borrow on variable rate savings accounts.   Not too much fixed rate debt, not too many fixed rate deposits.

The idea the fed might cut two more times will hurt their margins though.  You can only go to zero plus fees on deposits while your top line interest income shrinks. 

Ironically at the same time they just made huge unrealized gains in their bond portfolios over the last five weeks. 

They're in for some earnings decline, my bet is the decline is slower than the pace they can buy back stock.

I may eat these words, but I don't think Warren can win.  The middle of the country is sick of Ivy Leaguer's talking down to them.  Biden cleans house, but the next three probably struggle.  Ironically after that there are a bunch of candidates that beat Trump handily if the democrats can actually nominate them.  The others that are guaranteed victory would have more support if the practical money wasn't already behind Biden.  Amazing to me they can't just get behind a moderate state governor and move on.
« Last Edit: August 08, 2019, 07:17:30 AM by chasesfish »

chasesfish

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Re: Bank Stocks
« Reply #122 on: August 15, 2019, 06:14:41 AM »
These are getting exciting, may have another 10% down though

FIRE@50

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Re: Bank Stocks
« Reply #123 on: August 15, 2019, 08:08:40 AM »
I love watching the dividend yields creep up as the prices drop. There are some eye opening numbers out there.

chasesfish

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Re: Bank Stocks
« Reply #124 on: August 15, 2019, 08:54:31 AM »
I love watching the dividend yields creep up as the prices drop. There are some eye opening numbers out there.

And this is with payout ratios capped at 50% or so by the regulators, they can slow buybacks first to absorb credit losses

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Re: Bank Stocks
« Reply #125 on: August 15, 2019, 04:16:09 PM »
Nice looking numbers indeed! Quick question. Why is the market not loving banks right now?

ctuser1

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Re: Bank Stocks
« Reply #126 on: August 15, 2019, 04:58:46 PM »
Nice looking numbers indeed! Quick question. Why is the market not loving banks right now?

1. If rates go down, potentially into the negative territory, that will result in a major headwind for many of the banks.
2. Banks make money based on short and long term interest rate differences, and need the yield curve to be upward sloping. In inverted yield curve, or even a very gradual slope, results in lower profit.
3. Banks can't isolate themselves very effectively from overseas recession due to many secondary effects. A recession seems very likely outside US.

chasesfish

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Re: Bank Stocks
« Reply #127 on: August 15, 2019, 06:24:29 PM »
Nice looking numbers indeed! Quick question. Why is the market not loving banks right now?

1. If rates go down, potentially into the negative territory, that will result in a major headwind for many of the banks.
2. Banks make money based on short and long term interest rate differences, and need the yield curve to be upward sloping. In inverted yield curve, or even a very gradual slope, results in lower profit.
3. Banks can't isolate themselves very effectively from overseas recession due to many secondary effects. A recession seems very likely outside US.

Pretty much all of this.   Many of the larger banks also depend on investment banking for fee revenue, which drops when the economy slows.  There's also political risk with two of the top five polling candidates on the democratic side telling people that corporations and rich are responsible for everything wrong in their life. 

The question to me comes down to historically banks are worth 15x earnings.  Today they're trading in the 8-9x range.  How far will earnings fall and when...and how much stock can the banks retire between now and then to shield EPS.  There's also a huge need for consolidation, which is talked about but slow to happen.  This is deep value investing and now that this happened to the yield curve, not for the feight of heart.

* On a side note, the banks now all have big unrealized gains in their bond portfolios.  Some may cash out the gains now while others may hold it and let the higher rate bonds payout over time. 

ctuser1

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Re: Bank Stocks
« Reply #128 on: August 15, 2019, 07:19:23 PM »
Most banks are cheaper than their intrinsic value.

This means anybody who is investing (as opposed to gambling or trading) should load up on them. :-)

In practical terms, if you have a long time horizon (20-30 years, or longer), load up on the US banks.

Vanguard has VFH. https://www.morningstar.com/etfs/arcx/vfh/portfolio

I'm not sure if there is any good etf on just large banks within VFH. I have individual positions on WFC and BAC, in addition to VFH.

Buffalo Chip

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Re: Bank Stocks
« Reply #129 on: August 15, 2019, 08:14:05 PM »
Nice looking numbers indeed! Quick question. Why is the market not loving banks right now?

1. If rates go down, potentially into the negative territory, that will result in a major headwind for many of the banks.
2. Banks make money based on short and long term interest rate differences, and need the yield curve to be upward sloping. In inverted yield curve, or even a very gradual slope, results in lower profit.
3. Banks can't isolate themselves very effectively from overseas recession due to many secondary effects. A recession seems very likely outside US.

Pretty much all of this.   Many of the larger banks also depend on investment banking for fee revenue, which drops when the economy slows.  There's also political risk with two of the top five polling candidates on the democratic side telling people that corporations and rich are responsible for everything wrong in their life. 

The question to me comes down to historically banks are worth 15x earnings.  Today they're trading in the 8-9x range.  How far will earnings fall and when...and how much stock can the banks retire between now and then to shield EPS.  There's also a huge need for consolidation, which is talked about but slow to happen.  This is deep value investing and now that this happened to the yield curve, not for the feight of heart.

* On a side note, the banks now all have big unrealized gains in their bond portfolios.  Some may cash out the gains now while others may hold it and let the higher rate bonds payout over time.

Thanks to both of you for your insights. The PE ratios here are extremely attractive. The S+P 500 is somewhere north of 21 where banks are in the upper single digits. That screams SALE to me, although from a value perspective you need to make sure you’re not buying into a very low priced buggy whip industry circa 1920. Personally, I don’t see technical disruption getting rid of banks, but I sure see a lot of consolidation coming. How many bank branches do you need to have on every street corner? Apparently just one more.

I don’t worry about political risks in the US much. The cost of doing business is cyclical and will just increase. Same as it ever was.

Buy the hated.


habaneroNorway

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Re: Bank Stocks
« Reply #130 on: August 15, 2019, 11:58:29 PM »
Banks are a bit special, so it's probably more common to look at the Price / Book - ratio than the P/E - ratio. Bank stocks trade on the rich side if this is > 1 and on the cheap side when < 1

chasesfish

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Re: Bank Stocks
« Reply #131 on: August 16, 2019, 04:57:33 AM »
Banks are a bit special, so it's probably more common to look at the Price / Book - ratio than the P/E - ratio. Bank stocks trade on the rich side if this is > 1 and on the cheap side when < 1

This is accurate too.

$BOH is a long time holding of mine.  Always a higher PE and higher Price to Book (2.5x today).  Its more like a utility than a bank, super protected market and tons of excess capital.  Never cheap to own.

chasesfish

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Re: Bank Stocks
« Reply #132 on: August 16, 2019, 05:03:43 AM »
Banks aren't the buggy-whips.

The way you *really* loose money in bank stock investing is if credit losses exceed their loss reserves *plus* the bank's ability to absorb these losses by stopping buybacks, two things can happen that'll crush shareholder value.

- Dividend Cut
- Issuing more equity into the teeth of a bear market.

In the last recession, all banks cut their dividends and most issued equity into the bear market.  That was a worse of the worse scenario and not typical.  This didn't happen in the early 2000s or the early 90s.

The ones before that typically buybacks stopped and dividend raises were paused.  The poor actors in credit risk end up cutting their dividends and the worst actors have to raise equity into the teeth.   The latter is really rare, before it gets to that point they usually sell to a stronger player and you get the new bank's stock.  Their core deposits and franchise value can bring enough to the table for the acquirer to absorb the not so great credit book.   That's why we saw massive consolidation in the two recessions prior to 2007.

I'm in the 20-30 year camp on this investment too.

ctuser1

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Re: Bank Stocks
« Reply #133 on: August 16, 2019, 05:55:31 AM »
In the intermediate term, Elizabeth Warren is a serious Presidential candidate; she will probably not win, but she could, and she hates banks.

The political risk for banks and other large institutions is way overblown!!!

I am not a political person in real life, and by no means an expert on Elizabeth Warren's platform. However, I am pretty convinced that there is zero constituency in the Democratic party for actual left wing policies.

Remember : "left wing"/"socialist" = state control and/or ownership of the means of production. The most extreme policies I have heard from today's left wing is to just go back to the 1960's economic policies + civil rights. Unfortunately, that qualifies for "left wing" in our topsy turvy doublespeak world of today - where running $2Trillion deficit during boom times is considered "conservative"!!?!

I don't want to get to a political diatribe on this useful thread. But properly regulated banks are an extremely useful tool for any social goals that the so-called "left wing" will dream up. Alternative is loan sharks!!

The worst these "left wing" politicians will do to the banks is to split up main street and wall street banking once more, just like they were after the great depression. That will damage the investment thesis, but won't wipe you out.

chasesfish

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Re: Bank Stocks
« Reply #134 on: August 16, 2019, 11:11:26 AM »
I also don't want to turn this into a general political debate.  My specific concern with Elizabeth Warren is her campaign is specifically telling people that everything wrong with their life is the fault of billionaires and banks.  That's a route to fascism and central planning, private ownership with near complete state control.   Hard pass.

Fortunately Biden is polling so strongly perfectly reasonable candidates like Hickenlopper are already bowing out.  I'm a pretty middle of the road guy, I also dislike Trump's fascist policies regarding trade


Buffalo Chip

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Re: Bank Stocks
« Reply #135 on: August 18, 2019, 10:28:36 AM »
Curious as to what you’re thinking about WFC as opposed to BAC. WFC certainly has some reputation issues right now. However nice dividend and earnings. Contrarian play? BAC is popular the last couple of weeks. Is the recent popularity merited?


chasesfish

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Re: Bank Stocks
« Reply #136 on: August 18, 2019, 03:36:52 PM »
@Buffalo Chip - Biggest issue I have with Wells Fargo is they have no CEO.  Not only do they not have a CEO, they can't seem to get one that satisfies both the qualifications being demanded by the regulators but for a pay amount that will keep them from being whipped by Senate and Congressional committees.   They also have a consent order on them preventing them from growing.

Personally, I think they get the most value selling off their franchises state by state to other banks.  Eliminate the name, eliminate the history.

That probably won't happen, so until then I need a PE of six to seven before I buy the ship without a captain.

ctuser1

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Re: Bank Stocks
« Reply #137 on: August 18, 2019, 04:08:58 PM »
@Buffalo Chip
I got into WFC before the scandals started. At that time, I got into it as a deep value play among the bigger banks with a 20-30 year time horizon, basically the same thesis as BAC. I expected these banks to consolidate their lead over the smaller competitors due to how the economics of technology investments work.

Needless to say, all the scandals have not been good for this thesis as far WFC is concerned!! While BAC wins daily accolades for their app experience and files truckloads of technology patents every day, WFC is nowhere close to catching up to that level of technology leadership. The management is probably too distracted to launch a large, transformation effort that is required.

I have not sold out yet because I am still hopeful that the current storm will pass without significantly damaging it's consumer base, and WFC will eventually start reaping the benefits of scale. If WFC starts losing size/scale advantage then I will go out.

It was not a contrarian play when I got in, but continuing to hold is a contrarian play today hoping for an internal turnaround.

It's only a $20k position that has not done anything in the last few years - so not very material in the context of the full portfolio.

<Edited to Add>
For full disclosure I should add that trading any individual stock position is a huge PITA for me since my employer demands that I (or my wife, or any other family member) take a two level permission (manager, another internal regulatory oversight group) before doing any individual stock trade. Since 2013-14, this oversight group have started denying well over 50% of requests. If individual stock trading was easier for me then - who knows? - its possible I would not have invented the contrarian reasoning for staying in WFC and actually got out.
« Last Edit: August 18, 2019, 04:37:34 PM by ctuser1 »

Buffalo Chip

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Re: Bank Stocks
« Reply #138 on: August 18, 2019, 06:19:39 PM »
@Buffalo Chip - Biggest issue I have with Wells Fargo is they have no CEO.  Not only do they not have a CEO, they can't seem to get one that satisfies both the qualifications being demanded by the regulators but for a pay amount that will keep them from being whipped by Senate and Congressional committees.   They also have a consent order on them preventing them from growing.

Personally, I think they get the most value selling off their franchises state by state to other banks.  Eliminate the name, eliminate the history.

That probably won't happen, so until then I need a PE of six to seven before I buy the ship without a captain.

I agree that a Captainless ship is a problem. However they do have an acting CEO, or to continue with the analogy, a first mate who continues to steer. It occurs to me that if that person is successful, then keep him “acting” into perpetuity if that’s what it takes. In the end, who really cares about the title?

My concern about WFC is a little different. They have a huge branch footprint at a time when banks have moved to online. Seems you can’t drive to a commercial area and not see one of their branches.  I can’t remember the last time I actually went inside a bank other than to use an ATM.  Six months ago? Seems like a huge overhead to maintain for declining utility.

Thanks for the insights.

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Re: Bank Stocks
« Reply #139 on: August 18, 2019, 06:28:22 PM »
@Buffalo Chip
I got into WFC before the scandals started. At that time, I got into it as a deep value play among the bigger banks with a 20-30 year time horizon, basically the same thesis as BAC. I expected these banks to consolidate their lead over the smaller competitors due to how the economics of technology investments work.

Needless to say, all the scandals have not been good for this thesis as far WFC is concerned!! While BAC wins daily accolades for their app experience and files truckloads of technology patents every day, WFC is nowhere close to catching up to that level of technology leadership. The management is probably too distracted to launch a large, transformation effort that is required.

I have not sold out yet because I am still hopeful that the current storm will pass without significantly damaging it's consumer base, and WFC will eventually start reaping the benefits of scale. If WFC starts losing size/scale advantage then I will go out.

It was not a contrarian play when I got in, but continuing to hold is a contrarian play today hoping for an internal turnaround.

It's only a $20k position that has not done anything in the last few years - so not very material in the context of the full portfolio.

<Edited to Add>
For full disclosure I should add that trading any individual stock position is a huge PITA for me since my employer demands that I (or my wife, or any other family member) take a two level permission (manager, another internal regulatory oversight group) before doing any individual stock trade. Since 2013-14, this oversight group have started denying well over 50% of requests. If individual stock trading was easier for me then - who knows? - its possible I would not have invented the contrarian reasoning for staying in WFC and actually got out.

Thanks for the comments. As I noted above, the scope of their physical presence gives me a lot of pause.

chasesfish

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Re: Bank Stocks
« Reply #140 on: August 19, 2019, 05:43:40 AM »
The branch footprint is an entirely other issue.  The feds are really tough on a bank closing branches.  They usually force them to close branches in affluent areas and prevent the unprofitable (CRA) branches from closing.

For all the things that wrong with the BBT/STI and their merger, the big win on doing this they can whack almost 40% of the branch count.  They share branches on opposite corners of the same intersection in a ton of places.  I think the math was over 40% of their branches are within two miles from each other.  I expect their consumer side will come out a winner in this.

The case for two in-market banks to merge up is overwhelming because they can reduce branch overlap, I'm shocked more haven't done it yet.

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Re: Bank Stocks
« Reply #141 on: August 23, 2019, 05:38:59 PM »
Thanks to the tweet inspired sale this afternoon, BAC is the newest “dog” in my kennel!


chasesfish

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Re: Bank Stocks
« Reply #142 on: August 24, 2019, 06:45:28 AM »
Thanks to the tweet inspired sale this afternoon, BAC is the newest “dog” in my kennel!

What a wild ride

I was five cents a share away from trimming back Regions stock (limit order in place) then the war of tweets happened.

Patience...these bank's treasurers are buying back a ton of stock on each of these drops.  Earnings per share will drive that long term share price....short term, ugh

Buffalo Chip

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Re: Bank Stocks
« Reply #143 on: August 24, 2019, 09:09:48 AM »
Thanks to the tweet inspired sale this afternoon, BAC is the newest “dog” in my kennel!

What a wild ride

I was five cents a share away from trimming back Regions stock (limit order in place) then the war of tweets happened.

Patience...these bank's treasurers are buying back a ton of stock on each of these drops.  Earnings per share will drive that long term share price....short term, ugh

These rides are pretty predictable.  They seem to happen every couple of weeks. Like flash sales.

Verrrrrry interesting on what you were doing.  RF is one I have my eyeballs on as a future dog.  And Comerica. So why were you looking to sell?  Or am I misunderstanding?

I have to admit I'm having a blast buying single stocks. So many hated stocks out there!   

chasesfish

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Re: Bank Stocks
« Reply #144 on: August 25, 2019, 05:35:08 AM »
I own some RF already. 

I had bought an "extra" $10,000 in a tax deferred account when it got close to $13.50/share a week or more ago.  I was trying to turn it for $1/share profit or so.


Buffalo Chip

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Re: Bank Stocks
« Reply #145 on: August 25, 2019, 01:44:18 PM »
I own some RF already. 

I had bought an "extra" $10,000 in a tax deferred account when it got close to $13.50/share a week or more ago.  I was trying to turn it for $1/share profit or so.

 I have BAC as of Friday and want a couple more banks. Limit order didn’t hit my price on Friday. We’ll see if I get RF Monday on the dip. I’m looking long term buy and hold but hey, if you can turn a quick few bucks, why not?


chasesfish

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Re: Bank Stocks
« Reply #146 on: August 26, 2019, 04:30:45 AM »
I looked up CMA and was shocked at how cheap it is.

I know a bit about whats going on there and I struggle to say if its quite cheap enough.   They had some activist pressure three years ago, so they went and hired a big management consulting firm who helped them hit their earnings numbers for a few years.  The problem is it was a slash & burn program from Boston Consulting Group.

In banking you can get addicted to cutting costs at the expense of technology investments and employee development.  Depending on the size of the bank sometimes you can meet earnings for years before it all catches up.   It puts too much pressure on middle management, not enough time is spent developing employees, people leave, and eventually the bank misses on revenue growth and earnings.   CMA missed earnings last quarter, which may be once in a long line of misses. 

A bank's loan portfolio will organically decline by 6% or so a quarter.  It requires infrastructure to produce loans to replace what runs off.  The biggest ruse I've seen is just reducing those infrastructure costs and riding a declining portfolio to meet earnings for a few quarters.  It lets the executives keep their big salary and fancy jet at the expense of the enterprise.

All that being said, its hard not to look at a 7.5x PE based on 2020 estimates

Buffalo Chip

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Re: Bank Stocks
« Reply #147 on: August 27, 2019, 02:50:06 PM »
I looked up CMA and was shocked at how cheap it is.

I know a bit about whats going on there and I struggle to say if its quite cheap enough.   They had some activist pressure three years ago, so they went and hired a big management consulting firm who helped them hit their earnings numbers for a few years.  The problem is it was a slash & burn program from Boston Consulting Group.

In banking you can get addicted to cutting costs at the expense of technology investments and employee development.  Depending on the size of the bank sometimes you can meet earnings for years before it all catches up.   It puts too much pressure on middle management, not enough time is spent developing employees, people leave, and eventually the bank misses on revenue growth and earnings.   CMA missed earnings last quarter, which may be once in a long line of misses. 

A bank's loan portfolio will organically decline by 6% or so a quarter.  It requires infrastructure to produce loans to replace what runs off.  The biggest ruse I've seen is just reducing those infrastructure costs and riding a declining portfolio to meet earnings for a few quarters.  It lets the executives keep their big salary and fancy jet at the expense of the enterprise.

All that being said, its hard not to look at a 7.5x PE based on 2020 estimates

Yeah.  That PE is very attractive.  I took a quick glance at the 10Q balance sheet and it looks like for the last 6 months loans have been increasing. 

What is nagging at me is the overall size of CMA as compared to other, much bigger regional banks.  I believe that there will be consolidations. If so, who is going to be big enough or unique enough to get a date to the prom?   


chasesfish

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Re: Bank Stocks
« Reply #148 on: August 28, 2019, 05:23:44 AM »
@Buffalo Chip - Bingo on CMA.  Their footprint prevents *anyone* from wanting to buy them.  Even though the PE looks cheap, they still trade at 1.2x book value.

The only type of bank merger that really makes sense it to get more dense in markets a bank already operates in.  Comerica's footprint of Michigan, Texas, Florida, and California means they would have to be sold off in pieces.   

On the loan growth, take a look at the Net Interest Margin decline.  The game when a bank slash/burns costs to disguise the decline in loan growth is to buy into really large syndications at very low prices.  I lived this shell game at BB&T for the last five years.  Continue to cover up client loss through big marginally profitable loans.

ctuser1

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Re: Bank Stocks
« Reply #149 on: August 28, 2019, 06:26:37 AM »
The game when a bank slash/burns costs to disguise the decline in loan growth is to buy into really large syndications at very low prices.  I lived this shell game at BB&T for the last five years.  Continue to cover up client loss through big marginally profitable loans.

I'm very curious again!!

Are syndicated loans less profitable compared to other types of consumer/business loans?

Background:
I once had an extremely urgent marching order related to syndicated loans that left me with an impression that our employer (which was often the lead bank in such arrangements) found them to be very lucrative!! I was asked to patch up some of back end IT systems dealing with the risk participation swaps that reside behind the syndicated loans, so that my employer could participate in some opportunities it was so far missing out on. I vividly remember it because it was one of the least enjoyable (<5% actual programming work, 90+% paperwork) projects in my IT career, and yet one of the more business critical.

« Last Edit: August 28, 2019, 06:28:18 AM by ctuser1 »