Author Topic: buy bank stocks on the dip  (Read 50702 times)

BicycleB

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Re: buy bank stocks on the dip
« Reply #50 on: March 16, 2023, 05:07:57 PM »
Good info, gang!

In Pacnp, fingers crossed.

what is pacnp?

Maybe the Pa. Coalition of Nurse Practitioners is getting into banking. #Bloodbank?

@nouseforausername - LOL re bloodbank, I didn't sell it yet, may easily pour some blood on the streets!

Just a typo; I meant PACWP, the Pacwest Bancorp preferred stock that had been mentioned a few posts farther upthread.

Will probably sell tomorrow if the price holds, or at least the bulk of the position to realize a cash breakeven on the trade. If it doesn't hold, I may become the thread's poster child on how to lose money when my smart friends are all making it. (laughing crying emoji)

ETA 3/17/23 9:10 am CT: Sold this morning around $12. Roughly 30% gain on invesment. (shrug, sigh)
« Last Edit: March 17, 2023, 08:16:18 AM by BicycleB »

ChpBstrd

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Re: buy bank stocks on the dip
« Reply #51 on: March 17, 2023, 09:05:09 AM »
The paradox is that the more bond markets price in the probability of a banking crisis, the more they drive down bond yields, and this itself makes a banking crisis less likely because it inflates banks' collateral.

chasesfish

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Re: buy bank stocks on the dip
« Reply #52 on: March 17, 2023, 09:13:03 AM »
The paradox is that the more bond markets price in the probability of a banking crisis, the more they drive down bond yields, and this itself makes a banking crisis less likely because it inflates banks' collateral.

Meanwhile FRC had some $25 preferreds get back under $10 today.

I may not be able to help myself here

EscapeVelocity2020

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Re: buy bank stocks on the dip
« Reply #53 on: March 17, 2023, 09:36:57 AM »
I think bank stocks are falling now more based on the expectation of additional regulations killing their earnings going forward...

joe189man

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Re: buy bank stocks on the dip
« Reply #54 on: March 17, 2023, 09:39:00 AM »
PTF - Great conversation, Thanks

ChpBstrd

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Re: buy bank stocks on the dip
« Reply #55 on: March 17, 2023, 09:54:01 AM »
The paradox is that the more bond markets price in the probability of a banking crisis, the more they drive down bond yields, and this itself makes a banking crisis less likely because it inflates banks' collateral.

Meanwhile FRC had some $25 preferreds get back under $10 today.

I may not be able to help myself here

I would have thought the big banks' deposits plus the federal loan facility would have been perceived as good news. Don't these essentially foreclose on the possibility of an FRC collapse?

I'm also trying to find out if they cancelled the dividend on the preferreds.

daverobev

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Re: buy bank stocks on the dip
« Reply #56 on: March 17, 2023, 10:00:17 AM »
I would have thought the big banks' deposits plus the federal loan facility would have been perceived as good news. Don't these essentially foreclose on the possibility of an FRC collapse?

I'm also trying to find out if they cancelled the dividend on the preferreds.

https://news.firstrepublic.com/news-releases/news-release-details/reinforcing-confidence-first-republic-bank

Quote
Consistent with this focus and during this period of recovery, the Bank’s Board of Directors has determined to suspend its common stock dividend.

I'd guess to no?

Edit - I guess to your other point, thing is that... there just isn't a business left. Once all the deposits go, all you have left is a shell. It's... less than worthless, you have administration costs but no revenue!

I've stuck my toes back in for a few each of FRC, PACW and WAL prefs.
« Last Edit: March 17, 2023, 10:06:03 AM by daverobev »

gary3411

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Re: buy bank stocks on the dip
« Reply #57 on: March 17, 2023, 10:01:02 AM »
The paradox is that the more bond markets price in the probability of a banking crisis, the more they drive down bond yields, and this itself makes a banking crisis less likely because it inflates banks' collateral.

Meanwhile FRC had some $25 preferreds get back under $10 today.

I may not be able to help myself here

I would have thought the big banks' deposits plus the federal loan facility would have been perceived as good news. Don't these essentially foreclose on the possibility of an FRC collapse?

I'm also trying to find out if they cancelled the dividend on the preferreds.

I read somewhere FRC doesn't have any of the 'approved' collateral required to tap the federal facility. This is probably why the private big banks keep having to step in the last few days for them, specifically.

chasesfish

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Re: buy bank stocks on the dip
« Reply #58 on: March 17, 2023, 10:40:50 AM »
Prefs were not suspended (yet).

The purchase decision on those with FRC is basically handicapping possibilities:

Chance of Failure - X%  - Lose Everything
Survive but muddle along - X%  FRC-N is probably worth $15 share.  +/- depends on if the pref dividend gets suspended.
TFC/USB/PNC/JPM buy them for a few dollars a share on the common - X%  $20-$22/share.

I'm handicapping the chance of failure at 20-25%.   Every day they survive and every basis point rates fall increases the chances of survival.   Right now the balance is how negative is their net worth vs. how much is their goodwill worth.

Part of me feels crazy for making this bet a second time, but the market is presenting it to me.  Under $10 and especially under $9 makes that a nice risk/return profile, but I'm not putting too much in because it has the risk of being a zero.



« Last Edit: March 17, 2023, 10:44:21 AM by chasesfish »

daverobev

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Re: buy bank stocks on the dip
« Reply #59 on: March 17, 2023, 10:55:22 AM »
Do I like having money? Yes

Do I like the money I already have more than the money I might get by betting a lot on this stuff? Mmm, also yes, I guess.

What about PACWP and WAL-PA? Any thoughts on those?

bwall

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Re: buy bank stocks on the dip
« Reply #60 on: March 17, 2023, 11:19:48 AM »
Prefs were not suspended (yet).

The purchase decision on those with FRC is basically handicapping possibilities:

Chance of Failure - X%  - Lose Everything
Survive but muddle along - X%  FRC-N is probably worth $15 share.  +/- depends on if the pref dividend gets suspended.
TFC/USB/PNC/JPM buy them for a few dollars a share on the common - X%  $20-$22/share.

I'm handicapping the chance of failure at 20-25%.   Every day they survive and every basis point rates fall increases the chances of survival.   Right now the balance is how negative is their net worth vs. how much is their goodwill worth.

Part of me feels crazy for making this bet a second time, but the market is presenting it to me.  Under $10 and especially under $9 makes that a nice risk/return profile, but I'm not putting too much in because it has the risk of being a zero.

Thank you for the analysis, @chasesfish. It's valuable insight.

I think that if the Fed wanted to shutter FRC they would have done it by now.

I think that if a big bank had wanted to buy FRC they would have done it by now. (Arguably the political environment is against both Fed bail-outs and big banks getting bigger. YMMV.)

I think that the $30 billion deposited by the 11 banks is an old-fashioned way to stop a bank run. It worked in 1907 and it'll still work again today. It looks like the market needs a few extra days before it believes the run is over.

Therefore I believe the chances of FRC failure in the low single digits, alongside the chances of a takeover. I believe they will continue as a bank, greatly hobbled with the founder's life's work evaporated in a single week.

Of course, all these assumptions are based on information available right now. Something might happen in the next days to completely change everything.

bwall

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Re: buy bank stocks on the dip
« Reply #61 on: March 17, 2023, 11:23:13 AM »
What about PACWP and WAL-PA? Any thoughts on those?

I don't think you were asking me, but I'll give me 2 cents anyways, if that's ok.

I think that FRC is on the front lines. If it survives then PACWP and WAL-PA are in the clear. Beyond that, I have no great insights. :)

chasesfish

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Re: buy bank stocks on the dip
« Reply #62 on: March 17, 2023, 11:31:42 AM »
What about PACWP and WAL-PA? Any thoughts on those?

I don't think you were asking me, but I'll give me 2 cents anyways, if that's ok.

I think that FRC is on the front lines. If it survives then PACWP and WAL-PA are in the clear. Beyond that, I have no great insights. :)

I like the PACWPs below $10.   Bought and sold them for a decent gain earlier this week.  I have another order in at $10

The security is a bit funkier because it's a variable rate preferred.  Higher cash pay now, but lower terminal upside if rates fall.   I figure it's a $20 - $25 stock for a credit worthy bank, at a 50% discount I'll take my odds.  Realistically that 50% discount price might be higher than $10.

@bwall is correct, they are not front line, they are the line behind the front line. 

daverobev

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Re: buy bank stocks on the dip
« Reply #63 on: March 17, 2023, 11:50:42 AM »
Thanks both.

ChpBstrd

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Re: buy bank stocks on the dip
« Reply #64 on: March 17, 2023, 01:20:58 PM »
After some thought, I remain reluctant to dip a toe into banks. My reasons:

  • A recession is likely this year or next, and that means more loan defaults by consumers, businesses, and even municipalities. Even a small uptick in defaults could be a death blow for banks already battered by duration risk, because every 100% loss on an auto or small business loan does the same damage as 5x the damage the same amount invested in treasuries endured in 2022.
  • Earnings, stock prices, and valuation ratios can be expected to go down in a recession. There's still way too much optimism for this to be a bottom, and there are still way too many opportunities ahead to jump into the worst-run banks in the U.S.
  • Cash is pouring out of community bank accounts and into money market accounts. $121B moved last week, and more could be moving right now. This is just as much a bank run as any queue at the door. The run could force more banks to recognize losses on HTM assets, and as more businesses move their uninsured deposits, possibly creating a feedback loop.
  • Even if the retail banking industry is fine, why invest in a slow-to-no growth industry? Value? Those single digit PE ratios will flip to double digits soon enough, as mark-to-market losses start appearing on income statements and as recession sets in. Financials are historically the worst sector to be in right before a recession.
  • So why not buy the better-run banks which are not appearing in the headlines every day? Because their asset portfolios and levels of uninsured deposits look a lot like what the problem banks were holding. Long-duration treasuries and agencies are the new "toxic" asset and the talk about "marking to market" these AAA rated assets is very reminiscent of 2008. The problem is systemic, and related to the speed of interest rate increases, not just limited to a few bad banks.
  • An alternative to swinging for the fences with risky bank equity is to buy FDIC-insured CD's yielding north of 5%. If "don't lose money" is rule #1, we need to lose the TINA attitude and think in a probabilistic way about the risk of gambler's ruin. Those rates aren't bad when the rate of inflation for the past 7 months was about 2%.

chasesfish

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Re: buy bank stocks on the dip
« Reply #65 on: March 17, 2023, 02:02:26 PM »
Looks like I'll be going into the weekend with 650 shares of FRC-N at around a $9.05 cost basis and another 250 shares of PACWP that exercised at $9.90.

Wish me luck neither is shut down by the FDIC and the money is vaporized.   Fortunately the amount at risk is about equal to the gains of the week.

chasesfish

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Re: buy bank stocks on the dip
« Reply #66 on: March 17, 2023, 02:09:55 PM »
@ChpBstrd

You're not wrong.  This is not a time / game for most investors.

I personally believe there's value, but it will require finding a bank that does two things well and is priced right.   It requires a good deposit franchise (small dollar, low rate transaction accounts) that's also good at lending. 

This is going to be the squeeze of all margin squeezes, most banks are mediocre, very few are good at both of the above.  Then you have to hope the market gives you a chance to buy the ones good at both at Tangible Book Value.  It's still only a 12-15% return business, so you can't over pay.

The problem is many of the great deposit franchises got lazy and run a bond fund with 30-50% of their book.   These banks are crushed for years until the bond marks work through.

The banks who are great at lending often were bad at deposits and have no control over their cost of funds.  They get hamstrung by paying 5% for the next marginal dollar to loan.

Here we go


ChpBstrd

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Re: buy bank stocks on the dip
« Reply #67 on: March 17, 2023, 02:34:15 PM »
I have a few acquaintances who are, shall we say, very "man on the street" in terms of their financial education, quality of information sources, investing sophistication, and general judgement. They're good to keep around as predictors of consumer behavior and as a view into what information/misinformation the algorithms are feeding other people.

One such acquaintance announced that he withdrew everything from the bank today. Presumably he pays all his bills manually or maybe he was just kidding? Still, this is the first example I've personally heard where a middle class person withdrew money from the bank in response to the news.

This, and the speed at which most people make radical changes suggests to me there might be more withdraws this week than there were last week. I figured it would be big companies leading the charge into money market funds, but perhaps the middle class is primed to panic.

gary3411

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Re: buy bank stocks on the dip
« Reply #68 on: March 17, 2023, 02:36:15 PM »
After some thought, I remain reluctant to dip a toe into banks. My reasons:

  • A recession is likely this year or next, and that means more loan defaults by consumers, businesses, and even municipalities. Even a small uptick in defaults could be a death blow for banks already battered by duration risk, because every 100% loss on an auto or small business loan does the same damage as 5x the damage the same amount invested in treasuries endured in 2022.
  • Earnings, stock prices, and valuation ratios can be expected to go down in a recession. There's still way too much optimism for this to be a bottom, and there are still way too many opportunities ahead to jump into the worst-run banks in the U.S.
  • Cash is pouring out of community bank accounts and into money market accounts. $121B moved last week, and more could be moving right now. This is just as much a bank run as any queue at the door. The run could force more banks to recognize losses on HTM assets, and as more businesses move their uninsured deposits, possibly creating a feedback loop.
  • Even if the retail banking industry is fine, why invest in a slow-to-no growth industry? Value? Those single digit PE ratios will flip to double digits soon enough, as mark-to-market losses start appearing on income statements and as recession sets in. Financials are historically the worst sector to be in right before a recession.
  • So why not buy the better-run banks which are not appearing in the headlines every day? Because their asset portfolios and levels of uninsured deposits look a lot like what the problem banks were holding. Long-duration treasuries and agencies are the new "toxic" asset and the talk about "marking to market" these AAA rated assets is very reminiscent of 2008. The problem is systemic, and related to the speed of interest rate increases, not just limited to a few bad banks.
  • An alternative to swinging for the fences with risky bank equity is to buy FDIC-insured CD's yielding north of 5%. If "don't lose money" is rule #1, we need to lose the TINA attitude and think in a probabilistic way about the risk of gambler's ruin. Those rates aren't bad when the rate of inflation for the past 7 months was about 2%.

Been selling my 1-2 years treasuries this week at relatively big gains and tossing that money in these 5.4% CD's. Pretty hard not to.

bwall

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Re: buy bank stocks on the dip
« Reply #69 on: March 17, 2023, 03:05:43 PM »
Looks like I'll be going into the weekend with 650 shares of FRC-N at around a $9.05 cost basis and another 250 shares of PACWP that exercised at $9.90.

Wish me luck neither is shut down by the FDIC and the money is vaporized.   Fortunately the amount at risk is about equal to the gains of the week.

Well, there are a few banks with billions (!!) at risk if FRC goes under, so I'm guessing that FRC will make it through the weekend. I'd even go so far as to say that if the bankers who know about these things deposited $30 uninsured billion dollars with First Republic, FRC is out of the woods. The stock price action indicates otherwise, admittedly, so ¯\_(ツ)_/¯.

Who knows, if the adage "all news is good news" holds, then FRC may come out of this even stronger? JK.


bwall

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Re: buy bank stocks on the dip
« Reply #70 on: March 17, 2023, 03:14:30 PM »
After some thought, I remain reluctant to dip a toe into banks. My reasons:

  • A recession is likely this year or next, and that means more loan defaults by consumers, businesses, and even municipalities. Even a small uptick in defaults could be a death blow for banks already battered by duration risk, because every 100% loss on an auto or small business loan does the same damage as 5x the damage the same amount invested in treasuries endured in 2022.
  • Earnings, stock prices, and valuation ratios can be expected to go down in a recession. There's still way too much optimism for this to be a bottom, and there are still way too many opportunities ahead to jump into the worst-run banks in the U.S.
  • Cash is pouring out of community bank accounts and into money market accounts. $121B moved last week, and more could be moving right now. This is just as much a bank run as any queue at the door. The run could force more banks to recognize losses on HTM assets, and as more businesses move their uninsured deposits, possibly creating a feedback loop.
  • Even if the retail banking industry is fine, why invest in a slow-to-no growth industry? Value? Those single digit PE ratios will flip to double digits soon enough, as mark-to-market losses start appearing on income statements and as recession sets in. Financials are historically the worst sector to be in right before a recession.
  • So why not buy the better-run banks which are not appearing in the headlines every day? Because their asset portfolios and levels of uninsured deposits look a lot like what the problem banks were holding. Long-duration treasuries and agencies are the new "toxic" asset and the talk about "marking to market" these AAA rated assets is very reminiscent of 2008. The problem is systemic, and related to the speed of interest rate increases, not just limited to a few bad banks.
  • An alternative to swinging for the fences with risky bank equity is to buy FDIC-insured CD's yielding north of 5%. If "don't lose money" is rule #1, we need to lose the TINA attitude and think in a probabilistic way about the risk of gambler's ruin. Those rates aren't bad when the rate of inflation for the past 7 months was about 2%.

Great analysis here and also above ("Average man" = great to have around and listen to for another viewpoint). Thank you sharing your thoughts.

My counter-point; haven't banks traditionally done well in a rising interest rate environment? Isn't that their time to shine, when they can enjoy expanding interest margins by keeping deposit interest low and charging highest rates on new loans?

I guess my question here is; I'm not saying your wrong, I'm just trying to wrap my head around what's different this time as banks are getting whacked by higher interest rates instead of, ahem, 'making bank'. @chasesfish , if you have thoughts/commentary to this, please kindly provide.



windytrail

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Re: buy bank stocks on the dip
« Reply #71 on: March 17, 2023, 04:48:20 PM »
I just bought a 9-month CD worth $15,000 for 5.15% at Vanguard (whose CDs are supposedly all FDIC insured). The money was sitting in my savings account earning 2.4% interest, accumulating for a potential down payment on a home next year. So this will earn an extra ~$300 according to my calculation. Not bad for risk-free money!

chasesfish

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Re: buy bank stocks on the dip
« Reply #72 on: March 18, 2023, 04:58:32 AM »
@bwall The way I look into a bank to tell if they're "making bank" is to pull their FDIC call report.

https://cdr.ffiec.gov/public/ManageFacsimiles.aspx

Then I look for two things:

1) What is their deposit mix?  It is 30%+ non-interest bearing deposits?   Usually this is retail / small business checking accounts, the things that don't automatically pay more interest when rates go up.

2) I look at their loan maturities.   What is their total loan balance?  How much of this is coming due in the next twelve months?   25-30% or more is a good number.  This means they aren't locked into a bunch of long term fixed rate commercial loans.

I'm long BofA and two small community banks because they meet this profile.   BofA has some interest rate risk in it's mortgage book and some hedges in place, but their core business is being the #1 retail checking account provider and turning around and loaning those funds on variable rates to the lowest risk end of large businesses. 

daverobev

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Re: buy bank stocks on the dip
« Reply #73 on: March 18, 2023, 05:02:02 AM »
Looks like I'll be going into the weekend with 650 shares of FRC-N at around a $9.05 cost basis and another 250 shares of PACWP that exercised at $9.90.

Wish me luck neither is shut down by the FDIC and the money is vaporized.   Fortunately the amount at risk is about equal to the gains of the week.

https://www.pacwestbancorp.com/news-market-data/news/news-details/2023/Pacific-Western-Bank-Issues-End-of-Week-Update/default.aspx

Looks like PACW is ok, at least, for the time being (I've got 130 shares of PACWP, none of anything else at the moment).

Edit: WAL stabilising as well?

https://investors.westernalliancebancorporation.com/news-releases/news/news-details/2023/Western-Alliance-Bank-Provides-End-of-Week-Update/default.aspx
« Last Edit: March 18, 2023, 05:09:39 AM by daverobev »

bwall

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Re: buy bank stocks on the dip
« Reply #74 on: March 18, 2023, 09:52:00 AM »
@bwall The way I look into a bank to tell if they're "making bank" is to pull their FDIC call report.

https://cdr.ffiec.gov/public/ManageFacsimiles.aspx

Then I look for two things:

1) What is their deposit mix?  It is 30%+ non-interest bearing deposits?   Usually this is retail / small business checking accounts, the things that don't automatically pay more interest when rates go up.

2) I look at their loan maturities.   What is their total loan balance?  How much of this is coming due in the next twelve months?   25-30% or more is a good number.  This means they aren't locked into a bunch of long term fixed rate commercial loans.

I'm long BofA and two small community banks because they meet this profile.   BofA has some interest rate risk in it's mortgage book and some hedges in place, but their core business is being the #1 retail checking account provider and turning around and loaning those funds on variable rates to the lowest risk end of large businesses.
OMG! The 21st Century is amazing! Not only can a former banker provide information on how to analyze a bank, he can also provide a link to look it up!

This is amazing. Thank you.

Now I'm gonna go digging. "There's gotta be a horse in here somewhere!" :)

chasesfish

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Re: buy bank stocks on the dip
« Reply #75 on: March 19, 2023, 06:50:12 AM »
@bwall - My only frustration is the best fitting banks have a pretty illiquid market.

A community bank with $1bil in total loans may only have a $60mil to $90mil market cap.  Most of the stock is owned by families who help found the bank or inherited it over the years.  I'll buy on limit orders and count of the math of something earning a 15% ROE in a consistent business paying off over time. 

bwall

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Re: buy bank stocks on the dip
« Reply #76 on: March 20, 2023, 07:58:27 AM »
What about PACWP and WAL-PA? Any thoughts on those?

I don't think you were asking me, but I'll give me 2 cents anyways, if that's ok.

I think that FRC is on the front lines. If it survives then PACWP and WAL-PA are in the clear. Beyond that, I have no great insights. :)

I like the PACWPs below $10.   Bought and sold them for a decent gain earlier this week.  I have another order in at $10

The security is a bit funkier because it's a variable rate preferred.  Higher cash pay now, but lower terminal upside if rates fall.   I figure it's a $20 - $25 stock for a credit worthy bank, at a 50% discount I'll take my odds.  Realistically that 50% discount price might be higher than $10.

@bwall is correct, they are not front line, they are the line behind the front line.

PacWest and all (?) the banks are up this morning, with the except of FRC. If FRC can withstand this onslaught then the banking crisis will be over---well, at least until the Fed speaks on Wednesday.

chasesfish

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Re: buy bank stocks on the dip
« Reply #77 on: March 20, 2023, 08:23:05 AM »
I hope some of these banks are selling off securities to raise liquidity now that the 5yr / 10yr treasury is at 3.5%.

If rates stay down, there's a price where FRC common becomes interesting.  Maybe single digits?  Their common and pref are still hated this morning.

I think the Signature Bank sale announcement has something to do with it.   The FDIC sold their deposits and Commercial and Industrial loan book, but did not sell their CRE book.   People smarter than me are reading that as lack of value in First Republic.


EscapeVelocity2020

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Re: buy bank stocks on the dip
« Reply #78 on: March 20, 2023, 08:43:26 AM »
What about PACWP and WAL-PA? Any thoughts on those?

I don't think you were asking me, but I'll give me 2 cents anyways, if that's ok.

I think that FRC is on the front lines. If it survives then PACWP and WAL-PA are in the clear. Beyond that, I have no great insights. :)

I like the PACWPs below $10.   Bought and sold them for a decent gain earlier this week.  I have another order in at $10

The security is a bit funkier because it's a variable rate preferred.  Higher cash pay now, but lower terminal upside if rates fall.   I figure it's a $20 - $25 stock for a credit worthy bank, at a 50% discount I'll take my odds.  Realistically that 50% discount price might be higher than $10.

@bwall is correct, they are not front line, they are the line behind the front line.

PacWest and all (?) the banks are up this morning, with the except of FRC. If FRC can withstand this onslaught then the banking crisis will be over---well, at least until the Fed speaks on Wednesday.

Talk about moral hazard though - if the Fed fully backstops FRC to keep its doors open, even though I highly doubt any of the money that has run is ever coming back, then how does the Fed get to pick and choose which banks live and which banks die?  Or is the plan to just keep taking underwater assets off their hands on on to the Fed balance sheet until the whole banking system is rid of their bad bets...  obviously setting a precedent that it doesn't matter what they invest their deposits in?

We are in some uncharted waters here

ChpBstrd

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Re: buy bank stocks on the dip
« Reply #79 on: March 20, 2023, 09:54:53 AM »
What about PACWP and WAL-PA? Any thoughts on those?

I don't think you were asking me, but I'll give me 2 cents anyways, if that's ok.

I think that FRC is on the front lines. If it survives then PACWP and WAL-PA are in the clear. Beyond that, I have no great insights. :)

I like the PACWPs below $10.   Bought and sold them for a decent gain earlier this week.  I have another order in at $10

The security is a bit funkier because it's a variable rate preferred.  Higher cash pay now, but lower terminal upside if rates fall.   I figure it's a $20 - $25 stock for a credit worthy bank, at a 50% discount I'll take my odds.  Realistically that 50% discount price might be higher than $10.

@bwall is correct, they are not front line, they are the line behind the front line.

PacWest and all (?) the banks are up this morning, with the except of FRC. If FRC can withstand this onslaught then the banking crisis will be over---well, at least until the Fed speaks on Wednesday.

Talk about moral hazard though - if the Fed fully backstops FRC to keep its doors open, even though I highly doubt any of the money that has run is ever coming back, then how does the Fed get to pick and choose which banks live and which banks die?  Or is the plan to just keep taking underwater assets off their hands on on to the Fed balance sheet until the whole banking system is rid of their bad bets...  obviously setting a precedent that it doesn't matter what they invest their deposits in?

We are in some uncharted waters here
In 2008, the issue was that the large investment banks had written credit default swaps to insure mortgage portfolios that lost value. Today the largest investment banks are better regulated and must meet strict stress testing. Smaller banks like SVB, SI, FRC, etc. however, were deregulated by the 2018 law which repealed much of Dodd-Frank for most banks. It is these hundreds of smaller banks which are at risk of classic bank runs now. Instead of a bailout of the biggest banks, we're looking at a bailout of the smallest banks, and there are too many of them to take a one-by-one approach, arranging loans and mergers like in 2008 (exception: the Swiss had to allow their 2 largest banks to merge).

Additionally, these smaller banks did not get in trouble by doing risky financial engineering or buying assets recognized as risky. They were doing traditional banking and buying the safest government-backed assets they could buy. They got over-leveraged due to deregulation and low interest rates, but other than that didn't do anything morally reprehensible. They just weren't prepared for 475 basis points of rate hikes in 12 months.

As I noted in the interest rates thread, the FOMC is simultaneously doing QT in the open markets and QE with the bank lending program. Cash is flowing out of the Main Street economy and into bonds via QT, and cash is flowing into banks and out of bonds via QE.


 

EscapeVelocity2020

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Re: buy bank stocks on the dip
« Reply #80 on: March 20, 2023, 10:28:20 AM »
Thanks for the feedback / discussion.  It is the sudden increase in the Fed Balance sheet that concerns me, as well as not fully understanding / finding transparency on how this borrowing window is being run.  $300B was transferred on to the Fed balance sheet last week (ostensibly low yield long duration bonds and maybe some mortgage backed securities - certainly the most underwater junk from these regional bank assets), and more this week...  I'd love to understand this better and get a feel for what the Fed limitations are, I'd think every regional bank deserves the same 'fair shake' to get rid of their worst liabilities and shore up their balance sheet, but if they are losing deposits anyway then there's moral hazard that the Fed Balance sheet is being used to improve their business with no benefit to anyone other than the bank itself.

Also QT is unpredictable.  I'm not sure the Fed knows how strong of an effect it has on inflation vs. the Fed Funds rates...

chasesfish

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Re: buy bank stocks on the dip
« Reply #81 on: March 20, 2023, 10:50:57 AM »
A few comments for today:

I think *most* of the media is getting confused / mixed up / dramatic about regulation vs. enforcement.   This is not an issue of creating / needing new rules, as much as it is about figuring out "why" things weren't enforced with known information.   SVB's balance sheet woes were known in Q3/Q4 last year.  It wasn't a secret in the banking community, everyone just assumed it would work out with time.   VCs running their own bank wasn't a scenario.   There was plenty of enforcement that could have been taken in Q4, mainly forcing the bank to raise capital and it wasn't required. 

Politicians will look for ways to say they "took action", but the core of this is to tinker with stress testing to give some validation to the enforcement mechanisms needed.

I also hope the FDIC Insurance issues can be worked out.   Everyone should watch this clip starting at 1:15, it's a smaller state senator asking valid questions to Yellen.   I'm halfway impressed a Senator knew this issue well enough to ask the right questions.   Any of the senators from states without a top 30 metro area, regardless of party, could have asked this question.   The community bank cohert is not happy about being charged for bailing out a California based bank with VC depositors who ran their own bank, the same bank that co-invested in their companies for 20 years, with no consequences to the VCs.   Those assessment costs are real.

Should depositors be able to choose to pay an additional fee for insurance?   Should the cap just be raised again, like it was in 2008, from $100,000 to $250,000?  Should the larger banks pay larger assessments since they've already been declared a SIFI?  The moral hazard and taxpayer questions here are valid.

As for the market today and my concern in general?

$FRC is not looking good today.  My decision to dabble back into these preferreds may not be good.  Other banks may have found their floor.

Overall, I'm more concerned about credit standards tightening up even more.   Banks are looking at a margin squeeze, more expensive capital, and new assessments at the same time.  The best way to mathematically deal with this is to stop growing and be sure not to add incremental credit risk on top of it.  If the consequence of this uncertainty is a "lending strike", we could be in a world of hurt.   




 
« Last Edit: March 20, 2023, 03:36:16 PM by chasesfish »

EscapeVelocity2020

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Re: buy bank stocks on the dip
« Reply #82 on: March 20, 2023, 11:07:48 AM »
That clip was spot on Chasefish.  Any well managed money (aka the largest customer accounts) is being moved out of regional banks in to the 'too big to fail' SIFI's.  The value proposition of using a regional bank has been flipped on its head, they all need to merge and become 'systemically important' ASAP 

BicycleB

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Re: buy bank stocks on the dip
« Reply #83 on: March 20, 2023, 11:11:39 AM »

Overall, I'm more concerned about credit standards tightening up even more.   Banks are looking at a margin squeeze, more expensive capital, and new assessments at the same time.  The best way to mathematically deal with this is to stop growing and be sure not to add incremental credit risk on top of it.  If the consequence of this uncertainty is a "lending strike", we could be in a world of hurt.

@chasesfish, very educational remarks re regulation, thanks for sharing your thoughts on this!

Re a lending strike, I assume that would affect numerous prospective borrowers, slowing down the economy and the job market - but having a strong deflationary impact. Could this be the mechanism that reins in inflation?

To the extent it pushes in that direction, would that imply lower interest rates, thus solving the problem of bank solvency because the bonds already held by banks would be adequately priced again?

ChpBstrd

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Re: buy bank stocks on the dip
« Reply #84 on: March 20, 2023, 01:04:20 PM »
Re a lending strike, I assume that would affect numerous prospective borrowers, slowing down the economy and the job market - but having a strong deflationary impact. Could this be the mechanism that reins in inflation?
I think so. Inflation is yesterday's battle at the point when banks stop lending.

Recall that the mortgage crisis of 2007-2008 only affected the rest of the economy to the extent that it shut down bank lending.

Right now, futures markets indicate a 26% chance that the Fed doesn't raise rates on Wednesday, and a 74% chance they raise rates a quarter percent.

Michael in ABQ

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Re: buy bank stocks on the dip
« Reply #85 on: March 20, 2023, 02:48:54 PM »
Personally I bought / added to three community banks at or below book value today that I know well ($ASRV, $PKKW, $SMMF).  I hold BofA, and I added preferred shares of two of the distressed banks (PACW and FRC).   I like the prefereds that were issued at a $25 par value and can be bought below $12/share.   The risk/return seems appropriate.   Bank survives and it returns to a security worth $20-$25/share depending on rates.  Bank fails, I lose my $8-$10/share.   In the meantime, I collected a 10%+ yield even if the common shareholders are gutted.   Bank management tends to choose to protect their jobs via dilution instead of selling.   

I just picked up some shares of PACWP at about $13 that will pay a dividend of approximately 20%. I could have made out even better on Friday when it was closer to $10/share but I had to transfer in some cash that didn't post until Monday.

daverobev

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Re: buy bank stocks on the dip
« Reply #86 on: March 20, 2023, 03:33:27 PM »
I just picked up some shares of PACWP at about $13 that will pay a dividend of approximately 20%. I could have made out even better on Friday when it was closer to $10/share but I had to transfer in some cash that didn't post until Monday.

$1.94 of dividends I believe, so more like 15% at $13. I've been buying a few myself.

chasesfish

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Re: buy bank stocks on the dip
« Reply #87 on: March 20, 2023, 03:50:09 PM »
What a day.

It looks like FRC is sitting squarely in the eye of the storm while the rest of the banks moved away from it.   Congrats on the PACWP purchases, remember that's a variable rate preferred stock, so if rates go down so will your dividend.  If it gets to $18+, take your funds and enjoy.   I tossed a little more at the eye of the storm, so if FRC gets vaporized, I will have had fun and be back at breakeven.  If they survive, this game may net me 20k.   I'm convinced they're stock is worth somewhere between $1 and $5, just feel like an idiot for staring at the $25 puts for $7 and not buying a few days ago.

Appreciate all the comments.  I don't know if this thread knows, but I'm four years since quitting the job and last year I picked up some project work, basically representing clients on the lending side of $2mil to $10mil commercial real estate transactions.  I have a deal for $4mil currently in the market and I feel the noose tightening around bank lending.   It's a solid B deal, not the perfect deal everyone wants, but way past the threashold of good deal but multiple players that would normally be in it passed or came back so conservative it might as well be a pass. 

There's a bit of a lending strike going on.   I also saw some rumors about Federal Home Loan Bank Advances.   For those who don't know, this is another quasi-public source of money for community and regional banks.   I'm not sure if it's a sign of deposits flowing into treasuries / big banks or community banks being overly cautious, but the rumor I hear is $300bil was advanced from that bank in the last week.    It's not cheap money...

https://www.fhlbdm.com/products-services/advances/

All of this stuff is like a puzzle.

My last comment going back to the clip, it's important to remember that all the top 20 banks basically abandoned MSAs below the top 30/50/100.   I grew up in an MSA with 250,000 and went to work for a predecessor for Truist right out of college.   In 2003, the company had eight business lenders serving that community to deploy their 20% or so market share of deposits.   Out of "efficiency", they have 1 person today.  That person just manages legacy borrowers.    The capacity is made up by community and small regional banks with retail shareholder bases in that geographic area.  The issue that senator brings up is real, even if the top 20 banks have branches in a town, they completely abandon lending to the business community.   It's mathematically more efficient to gather up those deposits and focus on lending them out in the top 50 cities.   If you go and punish community banks for the malfeasance of the top 20, there are consequences.   So yes, if I represented a state like Oklahoma, Maine, Vermont, or South Dakota, I'd be furious about the plan of who pays for the failure of a SIFI that would never serve my state.

Michael in ABQ

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Re: buy bank stocks on the dip
« Reply #88 on: March 20, 2023, 05:08:34 PM »
I just picked up some shares of PACWP at about $13 that will pay a dividend of approximately 20%. I could have made out even better on Friday when it was closer to $10/share but I had to transfer in some cash that didn't post until Monday.

$1.94 of dividends I believe, so more like 15% at $13. I've been buying a few myself.

Yes, I think Fidelity was showing the dividend based on the prior days' close at $10 or so. Still, 15% isn't bad. Heck if it goes back close to the original $25 par value I may just sell it.

reeshau

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Re: buy bank stocks on the dip
« Reply #89 on: March 20, 2023, 05:19:55 PM »
To @chasesfish 's comment re: regulation vs. enforcement:

Comes news this week that the Fed was aware of Silicon Valley Bank problems more than a year before its collapse.  In fact, the Fed cited "Matters Requiring Attention" as early as 2019.

chasesfish

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Re: buy bank stocks on the dip
« Reply #90 on: March 21, 2023, 04:36:21 AM »
To @chasesfish 's comment re: regulation vs. enforcement:

Comes news this week that the Fed was aware of Silicon Valley Bank problems more than a year before its collapse.  In fact, the Fed cited "Matters Requiring Attention" as early as 2019.

Correct.  This is a bank that went 10 months without a Chief Risk Officer.   It's *not* that hard of a role to fill, you either hire a deputy CRO from one of your peers / Big 4, or you give a promotion to someone in that same role from a smaller bank.  Who found this acceptable?

bwall

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Re: buy bank stocks on the dip
« Reply #91 on: March 21, 2023, 06:42:38 AM »
@chasesfish ;

I read an article yesterday about Credit Suisse wiping out the Additional Tier 1 (AT1) bondholders to the tune of $17 billion (ouch!).
https://finance.yahoo.com/news/analysis-credit-suisse-rescue-presents-073746371.html

I'd never heard of AT1 before this. Do US banks issue AT1 debt? Or is this only European lenders?

chasesfish

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Re: buy bank stocks on the dip
« Reply #92 on: March 21, 2023, 09:36:35 AM »
I don't know anymore than the news reported and haven't seen anything similar in US banks.

reeshau

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Re: buy bank stocks on the dip
« Reply #93 on: March 21, 2023, 10:24:57 AM »
They are available worldwide, as part of Basel III.

An opinion on adoption, from a 2017 paper:

"CoCos have taken off in Europe and the Asia Pacific region but [not] in the United States, as they
were deemed insufficiently debt-like to make their coupons tax deductible for the issuer. In
practice, this interpretation appears quite far from reality. CoCo bonds have been issued at
lower trigger levels than contemplated in early proposals. Low trigger CoCo bonds have very
little equity content, as they convert only upon a final breach of the core capital
requirements or even at the point of non-viability."

Michael in ABQ

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Re: buy bank stocks on the dip
« Reply #94 on: March 21, 2023, 10:53:26 AM »
I just picked up some shares of PACWP at about $13 that will pay a dividend of approximately 20%. I could have made out even better on Friday when it was closer to $10/share but I had to transfer in some cash that didn't post until Monday.

$1.94 of dividends I believe, so more like 15% at $13. I've been buying a few myself.

Yes, I think Fidelity was showing the dividend based on the prior days' close at $10 or so. Still, 15% isn't bad. Heck if it goes back close to the original $25 par value I may just sell it.

PACWP is already up 20% today to $15+ after rising 30% yesterday from a close on Friday just below $10 on a $25 par. Not bad. Of course, I only invested $200 so even if it doubles it's barely going to make a blip in my portfolio.

I bought another bank stock that's up 8% today - though still a bit below where I purchased it. Oh well, it's exciting to see that gain even though it's basically just noise compared to my index funds just chugging along with the other 99% of my portfolio.
« Last Edit: March 21, 2023, 01:42:03 PM by Michael in ABQ »

daverobev

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Re: buy bank stocks on the dip
« Reply #95 on: March 21, 2023, 11:27:07 AM »
So funny, my self castigation.

Drop? Ohhh why invest in this stuff.

Goes up? Ohhh why am I so timid! I should have put $10k, $20k in!!

Incredible swings.

EscapeVelocity2020

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Re: buy bank stocks on the dip
« Reply #96 on: March 21, 2023, 12:48:53 PM »
CNBC today - "the sector is tradable, but not a clear long term investment"...

BicycleB

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Re: buy bank stocks on the dip
« Reply #97 on: March 21, 2023, 01:12:20 PM »
To @chasesfish 's comment re: regulation vs. enforcement:

Comes news this week that the Fed was aware of Silicon Valley Bank problems more than a year before its collapse.  In fact, the Fed cited "Matters Requiring Attention" as early as 2019.

Correct.  This is a bank that went 10 months without a Chief Risk Officer.   It's *not* that hard of a role to fill, you either hire a deputy CRO from one of your peers / Big 4, or you give a promotion to someone in that same role from a smaller bank.  Who found this acceptable?

Probably the same boss who sold $3.5 million in stock! :)

A friend mentioned that 10 months thing. Our amateur response:

Oh ho, the role went empty right about the time rising rates probably lowered SVB's equity to zero. That's probably when someone wanted to start classifying the bonds as long term instead of available for sale. The risk officer said "That would be fraud! I quit!" and then for 10 months no candidate would touch the position due to wanting to avoid handcuffs. Or, they stalled filling the position to avoid the necessity of reviewing the new fraudulent practice.

Finally in January, when it appeared they would need to face the music soon, they approved the plan for the CEO to sell shares on a publicly stated "systematic" basis, which was also fraudulent - they made the plan knowing SVB was underwater, they just used the plan in hopes of avoiding a fraud charge on that count.

I'd say kudos to the departed risk officer but friend says she (she?) remained on payroll until October, just not in the position. We speculate she knew, was shut up, may well end up turning state's evidence.

If justice prevails. Such are our entertaining musings, anyway.
« Last Edit: March 21, 2023, 01:15:34 PM by BicycleB »

bwall

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Re: buy bank stocks on the dip
« Reply #98 on: March 21, 2023, 02:40:09 PM »
I don't know anymore than the news reported and haven't seen anything similar in US banks.

Thank you for the reply.

chasesfish

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Re: buy bank stocks on the dip
« Reply #99 on: March 21, 2023, 02:51:58 PM »
CNBC today - "the sector is tradable, but not a clear long term investment"...

I got a request today to write a long form blog about how to invest in financials.

Debating doing it, even though the core of investing in financials is market timing.

It's a business that's leveraged 8-1 with a consistent but capped upside, 12-15% returns on book equity in good times, 5-10% in slow times.

But businesses with 8-1 leverage come with wild tail risks and can either wipe you to zero in a failure, become zombie equity through dilution, or become zombie equity through bad management, insulated boards, and regulations that hurt activists.   

The only way to make investing in financials work is be incredibly disciplined on the price you pay when you buy and have set metrics on when to lighten a position. 

 

Wow, a phone plan for fifteen bucks!