Author Topic: Banking 2.0 & IFSR9  (Read 928 times)

JEast

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Banking 2.0 & IFSR9
« on: June 14, 2018, 12:44:25 PM »
From about 1986 thru to 1992, US banks in general had a tough time with the S&L crisis where over 1,000 banks were closed and that also included a nice recession in ’90-‘91.  Near the end of this terrible period, you could buy banks for 60-80% of TBV and all paying a healthy dividend.  Then, coming out of that period the banks had a long runway for 10-15 years only culminating in the beginning of the ’07 crisis.  It took nearly six years to clean up the mess the first time and appears that it has taken about 8 years to clean up the mess second time.  What’s different now versus the ’86-’92 period?  A lot. 
  • There were roughly 12,000 banks in the US in 1992 and today their are less than 4,900 due to consolidation and Dodd/Frank pushing smaller banks out, and
  • Now, the top 10 banks capture the vast majority of all US deposits.
  • The regulatory capture has also made the largest banks even in a more advantageous position with the ‘stickiness’ of IT, such as,
  • Winner takes all effects with digital and ongoing with Fintech R&D (e.g. what small bank can afford an annual $500m spend on cybersecurity).
  • Also, Buffett gave a big thumb up to banking last year with his BAC conversion and Dimon says it is just the sixth inning.
That is the US from a very cursory look, but what about Europe, the UK, and maybe Africa?  In essence, the UK is about two years behind the US and selective opportunities in Europe are a year or two behind the UK.  Also, the European regulators are forcing banks to up their IT game and only the bigger banks can afford this ongoing expense.  Again, the biggest banks appear to be locking in customers in a somewhat annuity type outcome, as the stickiness of IT will keep customers for a long time.  In addition, some big banks in the UK may even have better IT presently then in the US and are selling at only 70-90% of TBV.  In addition, with the ‘ring fencing’ in the UK is the financial risk reduced more due to a more centric domestic market?  Outside of the UK, there are some European banks with similar attributes and are selling for significantly less but maybe a little more political risk.

What makes some of these non-US banks seem interesting, along with the current low valuation with potentially annuity type returns going forward, is that they are actually cheaper than they appear due to the recently adopted IFSR9 (booking loan losses up front).  From a value perspective — this up front loss acts like additional margin of safety — does it not (e.g. many banks took 10-15% equity adjustments for anticipated loans losses)?  One could make an educated guess that loan-to-value-plus-collateral is better today than 10 years ago and this pro-cyclical accounting adoption should make the banks even more overcapitalized over the next few years, maybe longer.  As for the UK challenger banks, they have made good progress but its been easy pickings and their IT spend going forward will catch up to them eventually.  So and if we are in the sixth inning in the US as some have suggested, then Europe, the UK, and maybe Africa are only in the second or third inning.

What say our UK and European friends?


HJ

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Re: Banking 2.0 & IFSR9
« Reply #1 on: June 14, 2018, 06:44:19 PM »
Not that I'm any expert at European banking.  But I think there's a general perception that Europe is over banked.  Each country has their own national champion bank(s), and often times, those national champions are disproportionately large compared to their domestic GDP, relative to the banks in the US.  The ultra competitive banking landscape also leads to a less developed euro bond market, and more willingness to finance activities in the emerging markets, which at different times can be a good or a bad thing. Spanish banks roam all over Latin America, HSBC and Standard Chartered feels more Asian than European, both Swiss banks are truly too big to fail for Switzerland.   Maybe the one bank that has similarity in geographic mix in the US is Citi.  But as noted in the Citi thread, they do seem to have a knack for getting disproportionately caught up in every financial crisis. 

These are obviously way too generalized statements, and each bank should be evaluated on its own merit.  But European banking seems to be a slightly different animal, and a more difficult business than the US counterpart, where JPM, BAC, Wells Fargo all have super-regional, deposit taking roots. 

 
« Last Edit: June 14, 2018, 06:58:53 PM by HJ »

Spekulatius

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Re: Banking 2.0 & IFSR9
« Reply #2 on: June 14, 2018, 08:11:50 PM »
Europe isn’t necessarily overbanked. Germany for example has less than Hall the number of branches /100K of population than the US (14 in Germany vs 33 in the US)
https://fred.stlouisfed.org/series/DDAI02USA643NWDB

The problem for banks in Europe is that competition is higher and margins are lower. A lot of banks have lower NIM (~2% vs 3%+ in the US) and fee income is less too. There is little unsecured lending for example with credit cards in Europe. Mortgages aren’t sold off either, since the equivalent of Fannie/Freddie Mac does not exist. I think the lower profits are due to competition from semi state or federal owned saving banks (Sparkassen), Mutual banks (Raiffeisen) and the lower interest rates overall. The banks that are most similar to US banks are British banks. Those also generate better margins more equal to their US counterparts.
« Last Edit: June 15, 2018, 03:55:57 AM by Spekulatius »
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Jurgis

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Re: Banking 2.0 & IFSR9
« Reply #3 on: June 14, 2018, 08:57:31 PM »
AFAIK, Scandinavian banks in Lithuania pretty much mint money. There's almost no competition and they can gouge customers as much as they want. But then Lithuania is a small market - and that's the reason there's no competition - so maybe it doesn't move the needle much.
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vinod1

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Re: Banking 2.0 & IFSR9
« Reply #4 on: June 15, 2018, 03:23:21 AM »
I am more worried about tail risks related to Euro currency breakup.

Assets could end up being in one currency and liabilities could end up being in another currency. How would that impact bank capital?

For example, say Italy exits Euro currency. Most of the Italian bank loans are local and they would be marked in Lira. Their funding is more likely going to be remain in Euro.

This mismatch brings a host of risks. European banks look cheap, but every time I try to look at them, this tail risk keeps me from going forward.

Vinod
« Last Edit: June 15, 2018, 03:27:06 AM by vinod1 »
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racemize

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Re: Banking 2.0 & IFSR9
« Reply #5 on: June 15, 2018, 07:05:04 AM »
One thing I hadn't thought of (and TBW mentioned this to me when I was talking about Eurobank) was that a bank was, to a large extent, a bet on the sovereign bonds of that country.  For U.S./Canadians, that wasn't something that we had to even think about.  For Italy/Greece/etc., it definitely is.

Spekulatius

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Re: Banking 2.0 & IFSR9
« Reply #6 on: June 15, 2018, 08:12:52 AM »
One thing I hadn't thought of (and TBW mentioned this to me when I was talking about Eurobank) was that a bank was, to a large extent, a bet on the sovereign bonds of that country.  For U.S./Canadians, that wasn't something that we had to even think about.  For Italy/Greece/etc., it definitely is.
This is true in the US as well, it’s just that nobody is worried about US treasuries yet.

I do think that in some emerging markets, private credit ratings can be higher than the countries sovereign rating.
« Last Edit: June 15, 2018, 12:08:24 PM by Spekulatius »
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JEast

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Re: Banking 2.0 & IFSR9
« Reply #7 on: June 15, 2018, 09:58:06 AM »
Quote
to a large extent, a bet on the sovereign bonds of that country.

Maybe my comments were too subtle and the above quote is more to the point.  As all banks have pulled their horns in and have become basically domestic franchises, then what is a UK bank worth that has captured 9% of the domestic market with annuity type returns?  TBV is maybe an archaic measurement these days, but TBV plus intangible franchise value makes some look very inexpensive with only recessionary risk.  In a few select European countries, there are some domestic banks that have 25-40% market shares presently with negligible to zero intangibles on the balance sheet.

Spekulatius

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Re: Banking 2.0 & IFSR9
« Reply #8 on: June 17, 2018, 04:29:15 AM »
Quote
In a few select European countries, there are some domestic banks that have 25-40% market shares presently with negligible to zero intangibles on the balance sheet

Which banks are you looking at? So far, I think Lloyd’s (LYG)  and ING look reasonable to me.
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