buy bank stocks on the dip

[chasesfish]

One random post election update:

Outlook for an easier / more rational regulatory environment and potentially more inflation is boosting the regional / national bank stocks.

$VLY wasted no time announcing a dilutive secondary offering, they're going to issue 15% more stock at $9.35 now that it's above tangible book value of $8.79/share.   I think you'll see a little more of this from the middling CRE regional banks. 

I'll be interested to see the changes around M&A.

- Homestreet and FirstSun is being delayed by regulators, where I believe if FirstSun isn't allowed to takeunder Homestreet, it will fail.  There's zero reason to delay this vs. taking a hit to the FDIC fund

- Many mergers have included "pound of flesh" fines or "CRA commitments" to NGOs that effectively reduce the deal price.   If those are removed, valuations overall improve.

I'm not overly allocated to regionals / nationals anymore, I think they are fully valued.   I'm hoping the tailwinds will be in the $1bil banks as the yield curve normalizes, earnings improve, and overall franchise values are worth more due to a healthier M&A environment.   

[ChpBstrd]

Probably right @chasesfish. We've pivoted back to the season of mergers in tech, finance, and other industries, because of a change in the political environment. And this comes just as bank balance sheets have been fortified by regulators over the past two years. Well capitalized banks will be bought by even stronger banks for high prices. Instead of looking to buy bank stocks under book value, everyone is now thinking about buying under acquisition value.

Mergers are usually destructive to the value of the acquiring firm. I recall reading that about 70% destroy shareholder value for the acquiring firm's shareholders. So you want to be a shareholder in the bank being acquired, not the one doing the acquiring. But how do you choose? One possibility is to only buy the weakest banks, on the theory that they are in no position to be making offers and are thus more likely to be purchased for a premium.

For the indices, or KRE for example, I don't think the onset of merger season should add any value. For every company that gets acquired for a premium, another company's shareholders lose a premium. It's a wash overall. Of course, investors may have different opinions about which companies would be a good merger target or less likely to initiate an acquisition, and so they may bid up a wider range of stocks than the actual companies that are targeted. This factor could raise the whole indices, but it is a source of error.

I think the more significant post-election news is that market expectations for the most likely Federal Funds Rate in October 2025 have risen from an upper limit of 3.5% to an upper limit of 4%. Meanwhile, longer term treasury yields have risen, such as the 5y yield which is up over 70bp since September.

A historically typical term spread between the FFR and 10y note is about 2%, plus or minus 1%. If inflation fails to fall, and the FFR gets hung up at around 3.5% or 4%, then maybe the 10y note could rise to 5, 6, or 7 percent as the yield curve normalizes. This might be what bond investors have been thinking since September.

Bank investors should reconsider their assumptions about owners of CRE refinancing, or whether housing prices can stay this high for the next several years with mortgage rates over 6%, or the eventual recovery of bond portfolios.

Yes, as the yield curve uninverts, banks will again be able to borrow short term and lend long term, increasing income. But the tradeoff, which is probably not baked into the price right now, is a higher chance of asset price devaluation. Meanwhile, there's also the threat that any given bank decides to pay a fat premium to the shareholders of another bank.

[chasesfish]

@ChpBstrd - I have to add that a lot of the M&A will be necessary due to lack of talent in the industry.   Less people went into banking after 2008 and the business is now 12-15% ROE vs. 18-20% ROE business for a number of reasons.   There just isn't enough money going around to pay the limited amount of talent available to run 8,000 banks in the country.

I'm an investor in one challenged bank trading at a cheap discount, one of my questions to the Board Chairman is what does succession planning look like?  Every named executive is eligible for social security and the board of directors doesn't have a single person with experience working in the industry.   How do we get to this point?

As for whether the merger is accretive or value detructive, it's all about execution.  There's enough transactions to show plenty of examples in each camp.

[ChpBstrd]

@ChpBstrd - I have to add that a lot of the M&A will be necessary due to lack of talent in the industry.   Less people went into banking after 2008 and the business is now 12-15% ROE vs. 18-20% ROE business for a number of reasons.   There just isn't enough money going around to pay the limited amount of talent available to run 8,000 banks in the country.

I'm an investor in one challenged bank trading at a cheap discount, one of my questions to the Board Chairman is what does succession planning look like?  Every named executive is eligible for social security and the board of directors doesn't have a single person with experience working in the industry.   How do we get to this point?

As for whether the merger is accretive or value detructive, it's all about execution.  There's enough transactions to show plenty of examples in each camp.

That's an interesting insight. I've always been interested in banking and finance, but never worked in such a business. The post-2008 perception was that it involves working extremely hard to earn tiny margins that are hopefully enough to make up for losses due to fraud, malinvestment, and foreclosures/repossessions. And small banks were expected to be replaced by tech-savy big banks, in much the same way as neighborhood stock brokers were replaced by eTrade.

Obviously, those predictions didn't completely pan out. Banks like MTB, PNC, and RF sport profit margins that would not be out of place in the tech sector. And the way tech rolled out, my tiny one-city bank with 8 branches offers the same advanced access, analysis, and bill paying as the giants.

My attitude toward working at a bank has done a 180, but I'm also one of those people without a career of banking experience. @chasesfish maybe you should get on as many boards as possible, lol!

[chasesfish]

@chasesfish maybe you should get on as many boards as possible, lol!

Heh, the challenge is most bank boards don't want a person that'll have a discenting voice.  It's mostly friends of the CEO, Chairman, or major Shareholder looking for people to say "yes".

FWIW, I have numerous colleagues qualified to be small bank CEOs or small bank c-suite positions, they can make similar moeny in customer facing or high end risk management roles at a regional bank but stay 1-2 layers below the c-suite and not have to deal with the various headaches that come from a small bank.

There are also other career risks, one former colleague who was good at his job left the security of a high paying, customer facing role to be hired as the Chief Lending Officer as a lateral role with a succession plan to be CEO at a small bank.   The major shareholder of that bank dies, estate would rather the bank sell, and instead they lay him off (non-renew his contract) as a cost saving measure in advance of a sale.   These stories exist all over, it's just a challenging career risk to leave a customer facing role with the security that comes from revenue production for something that is a tougher job for not much more money.

[ChpBstrd]

Here's a tale of 2 charts if I've ever seen one. Office versus all CRE loans:

[chasesfish]

That's a pretty good depiction.   The CRE banks with office exposure are reporting a similar level of classified assets (+/-10%)

One comment on the charts, the first is Commercial Mortgage Backed Sercurities.   These are originated and sold into the bond markets by both mortgage REITs and banks.   That will go higher.

The second chart is CRE loans on bank balance sheets.   The same message I've been echoing for two years, banks aren't the permanent lenders on eight figure or larger office projects.   They might be the interim/construction lender and get caught on one, but holding those for 3+ years on a bank balance sheet just doesn't happen.

[ChpBstrd]

Necropost-revival!

I think we're in another "dip". Thus I've reviewed this thread to build a watchlist of bank stocks. It's amazing how many ticker symbols no longer exist, mostly due to mergers, but some due to bankruptcy.

Another lesson: We spent a lot more time talking about troubled banks like First Republic and NYCB, when the real gains would often be in the next tier up in quality. Perhaps this time too, we might expect a few banks on the frontlines of risk to die, and a dip to provide an entry opportunity into bank stocks. The idea is to buy the dip, not the garbage.

Financials have been historically described as a good sector to buy in the middle of a recession or in the early recovery. People like Blackrock CEO Larry Fink are now estimating a recession will start soon or has already started.


I think now is probably too early to buy. Huge shifts in asset values could have left some financial entities "swimming naked" to use a Warren Buffet metaphor, and it'll take months for us to learn about all these instances. For example, the housing market could finally crash due to a combination of rising mortgage rates, market losses devastating buyers' down payment funds, and potentially rising unemployment. And that's IF Fannie and Freddy aren't impulsively privatized without government guarantees. Or, if the bond vigilantes go on strike, we could see losses on the scale of 2022. Finally, there is the steady rise in delinquencies, and the risk that tariffs have made formerly viable businesses suddenly not-viable. Something seems prone to breaking, and so now is the time to build up dry powder. Then, if recession becomes obvious (it's currently not), pile into select bank stocks and preferred shares.

It's worth noting that all financials published now are "in the best of times" numbers. They all come from a time when asset prices, the USD, and employment were all high and stable, and therefore represent a snapshot of where banks might recover to after a recession. They probably do not represent the next 12-24 months though!

Here are some of my picks for further study, based on relatively high ROE and low price/book. As in 2023, 2020, and 2008 the key questions are asset concentration and quality. We can't 100% know that right now, but the 2023 test was not that long ago so this list largely represents the survivors of that recent squeeze.

Banks:
EWBC
OZK
FBAK
ZION
WAL
BOTJ
FITB

High-yielding Bank Preferreds, yield:
OZKAP, 7.07%
MTB/PRJ, 7.3%
BOH/PRA, 7.29%
CFG/PRH, 7.23%
UCB/PRI, 7.28%
HBANL, 6.92%
FHN/PRE, 6.89%
KEY/PRK, 6.82%

To be clear, I'm not saying buy now. But if tariffs lead to a bigger downturn there might be an opportunity in a few months. KRE largely tracked the S&P500 - until yesterday (4/10/25). Suddenly there's a 5.65% performance gap, suggesting that yesterday was the day many investors decided a credit event is on the way. If that gap continues to widen, it might be time to "buy bank stocks on the dip".

[chasesfish]

FWIW, I bought a decent amount of the 3x KRE Index DPST and added to NKSH.

My small tickers aren't getting more exciting yet and I'd be tempted to add to $BAC below if it gets well below $35.   I lightened that position in the mid 40s when interest rates looked to be persistently high.  You just can't own banks at more than 2x tangible book and expect a good risk/reward.

I also started sending my annual shareholder letters to some of my smaller holdings trading at 0.8x TBV today and worth 1.6x to 1.8x if they sell.  I don't want to push the banks to sell, but they do need to promote their stock and repurchase shares vs. aggressive growth.

[bluecollarmusician]

Necropost-revival!

I think we're in another "dip". Thus I've reviewed this thread to build a watchlist of bank stocks. It's amazing how many ticker symbols no longer exist, mostly due to mergers, but some due to bankruptcy.

@ChpBstrd - A very timely one, I would say- as I was revisiting this thread as well checking on the great spreadsheet @chasesfish made on preferred shares over the last week.

I still have decent allocation to bank and preferred shares- (maybe about 5% total assets and 8% of total portfolio) and I have considered increasing that somewhat depending on how things play out.

[ChpBstrd]

I did not end up buying any bank stocks on the last dip, because I was already fully allocated to option-hedged ETFs and they didn't dip very much.

But here's some data suggesting that banks are still sitting on much higher than normal paper losses on securities, even three years after the last mini-tantrum. So maybe we'll get another chance. Particularly with the upcoming tax bill, we could see another spike in treasury yields, with the 10y exceeding 5%. If such as spike is sustained, we might see banks come under pressure again.   
https://investorsobserver.com/news/rising-stock-prices-wont-fix-this-u-s-banks-are-sitting-on-500b-worth-of-unrealized-losses/



The case for it not being a problem is that the weakest hands were already shaken out just three years ago. But that argument depends on the willingness of the government to create new bailout/loan products, like three years ago. Now is a time to hide and wait.

[chasesfish]

Welcome back!

That chart is still incredibly stupid (IMO) without the context of how much in non-interest bearing deposits the banks have.   You have to mark up the value of those to play the "adjust the balance sheet" game.

Bank land?   Not much interesting, I bought some PNFP and HBAN towards the end of the April dip, not much else other than my comments above.  Starting to trim a little,, may let some BAC get called away at 1.6x book.  Bought 10k in a new preferred issuance (BUSE) that'll pay 8.25% for five years.

My small banks have been cooking this year, they have a ways to go.

The problem with banks will forever be it's a 12% ROE business without much growth that's levered to economic cycles.   Buy great names close to book when panic happens, or buy mediocre ones at a substantial discount to book.  Also understand book value vs. market value, those with larger non-interest bearing deposit books that don't get marked to market have a floor value that's a little above book value.