Author Topic: Are big banks value traps ?  (Read 8943 times)

Spekulatius

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Are big banks value traps ?
« on: October 04, 2019, 05:21:29 PM »
I had some thoughts on big banks (and small local ones) after selling my WFC position. My near term concern on WFC is NIM compression due to interest rates, but another thought that occurred to me, partly due to trains of thoughts from other boards here and on Twitter is that the big banks may be the department store equivalent of the financial industry.

With that, I mean a company that does a bit of everything, but nothing particularly well. This applies to many business lines like mortgages (in about 80% of the cases, one is better off with a good broker), payments (a lot tech companies here start to dis-mediate and Visa/ MC go after b2b payments), wealth management/ Broker (banks offer discounted trades as a bundle, but who cares when trades at a brokerage firm are free), Credit cards  and possible other things.

So it seems to me that big banks will be losing market share to innovators and smaller banks may be worse off, since they donít have IT heft. I am no sure how long takes, but it seems like one can see that over time nimble competitors take more and more share away from what once considered core bank business.

I would welcome thoughts here. I have personally decided to ditch my Wells Fargo brokerage and checking accounts (I got a package with 100 free trades annually) that I had since 2006 and use Schwab instead for cash management/checking and brokerage accounts.
« Last Edit: October 04, 2019, 08:42:00 PM by Spekulatius »
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TwoCitiesCapital

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Re: Are big banks value traps
« Reply #1 on: October 04, 2019, 06:13:27 PM »
I don't see a natural replacement for them yet, so m not terribly concerned. They'll just roll-up the innovators in the field and then the tech will become commodities over time.

Banks are hard to supplant because of the network effects. Where else do millions of borrowers and savers come together for mutual benefit and limited effort?

LC

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Re: Are big banks value traps
« Reply #2 on: October 04, 2019, 06:32:14 PM »
Also, who has billions/trillions on hand to lend out to massive companies and massive populations?

And, who has the institutional know-how to effectively risk manage that entire operation?

The barriers to entry to banking are immense. This is why we haven't seen a new big bank in a looooong time.
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no_free_lunch

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Re: Are big banks value traps
« Reply #3 on: October 04, 2019, 07:32:59 PM »
Also, who has billions/trillions on hand to lend out to massive companies and massive populations?

And, who has the institutional know-how to effectively risk manage that entire operation?

The barriers to entry to banking are immense. This is why we haven't seen a new big bank in a looooong time.

I have large positions in banks so I am really arguing with myself here.

Who has billions in cash?  Apple, Google, Facebook.  Even without taking in deposits they have huge reserves. 

Who has institution mal knowledge?  Not them but they probably know more about us than our banks do.  Maybe they could carve out niches by building internal credit models and expand from there.

I think big tech will come for banks but I think it will take time.  You can see it happening with things like Apple pay and maybe libra.  You definitely have to be vigilant with the banks.

sleepydragon

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Re: Are big banks value traps
« Reply #4 on: October 04, 2019, 07:34:43 PM »
Banks, prostitutes, and weapon making have existed for hundreds of years.
Not going away

villainx

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Re: Are big banks value traps
« Reply #5 on: October 04, 2019, 07:51:10 PM »
Also, who has billions/trillions on hand to lend out to massive companies and massive populations?

And, who has the institutional know-how to effectively risk manage that entire operation?

The barriers to entry to banking are immense. This is why we haven't seen a new big bank in a looooong time.

I have large positions in banks so I am really arguing with myself here.

Who has billions in cash?  Apple, Google, Facebook.  Even without taking in deposits they have huge reserves. 

Who has institution mal knowledge?  Not them but they probably know more about us than our banks do.  Maybe they could carve out niches by building internal credit models and expand from there.

I think big tech will come for banks but I think it will take time.  You can see it happening with things like Apple pay and maybe libra.  You definitely have to be vigilant with the banks.

Great point.

And players coming in from the side.  Thinking mostly Square, but if Square can do it, why not Apple.  Or Costco or Amazon.  Not necessarily a threat, maybe a shakeup?  Where players with imagination/innovation/capital/captured clients can do something unexpected.

Spekulatius

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Re: Are big banks value traps
« Reply #6 on: October 04, 2019, 08:41:25 PM »
Also, who has billions/trillions on hand to lend out to massive companies and massive populations?

And, who has the institutional know-how to effectively risk manage that entire operation?

The barriers to entry to banking are immense. This is why we haven't seen a new big bank in a looooong time.

Competitors will go after the higher ROI business first and then try to make run them better. Think, Credit cards, loan generation, mortgages, payment, wealth management. Lending itself is harder to dis-intermediate, but Even if that were all that is left, banks would be much worse business than they are now. In the longer run, crypto solutions could put a dent into this business too and basically make the banks redundant as loans would go peer to peer. We are a long way off, but this doesnít mean it wonít happen.

The problem is that banks are stodgy and not tech savvy in general and that will probably be the most important factor going forward, not balance sheet strength or branch networks. JPM probably looks best here, Wells Fargo the worst from then it banks.
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LC

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Re: Are big banks value traps
« Reply #7 on: October 04, 2019, 10:02:47 PM »
I'm playing devils advocate here but I think you guys underestimate the banking business, particularly in today's world.

Calling the banks stodgy or tech-averse is superficial IMHO. Banks are not tech averse, they are incredibly financially disciplined (it's their raison d'etre!). These are not VC shops looking to cash in by inventing the next best tech.

Additionally you are ignoring the regulatory component. The FRB will be so far up a new bank's colon that it's too painful to think of. The large banks took 10 years to comply with FRB/OCC matters. And they are still not done.

Citi, Wells, JPM all have over 200,000 employees, each. Google and apple have half that. Simply to bring on the kind of manpower needed will be a billion dollar endeavor.

It is not just 'lets build some credit models and start slingin' cards". On the models side, these banks have 2, 3, 4 thousand models each. Who is going to build these? Who is going to validate them? How long is that going to take? It is not feasible. And the people building these models - they are not cheap. We billed out at 600, 700 an hour for regulatory models, not even valuation models which are much more important. And then you need a validation group which again, is incredibly not cheap.

Then you need to integrate into the markets. On the consumer side, now you need instantaneous scoring services at a massive scale and you need retail partners to integrate it. Retail partners who are already being serviced by these large banks and at a lower cost than you can provide. And these banks and policy teams who know these business better than you (and they) do. This is not just incredibly expensive but a hell of an endeavor to start from scratch. Systems migrations take two years - and that's a migration.

On the institutional side, it's even more opaque. First you have no idea what these product which are being traded. Show me anyone at Apple or Google who can explain why Kirk's spread option model is conceptually unsound but under what circumstances it is still acceptable to use. Nobody. Now tell me who is going to figure that out and then design a systems application to price certain products with certain models under specific circumstances. Of course you can use vendors to tap into the market in this way but the regulators will destroy you. And they're expensive as hell and there's a reason all the banks have migrated to in-house solutions. So unless you want to lose money on every trade for 4-5 years until you can build your own system to migrate over from a vendor platform, you're out of luck.

This article: https://seekingalpha.com/article/2561895-apple-pay-has-long-term-implications-for-visa-mastercard-and-retail-banks
postulates that Apple is entering the retail payments sphere as a means to enter the financial industry at a whole.
Well look at the payments - has Apple or Stripe built their own systems? No, they are playing on top of the established rails. Maybe this will change but it is difficult to see why. To build out such a system is incredibly expensive and the payoff is very uncertain. Expected ROI today is almost certainly very negative. And V/MC and the banks are expected to sit tight while this happens? I think not. Even if Apple or Google does go down this road they are opening themselves up to so many costs it will be absolutely brutal and the banks will slaughter them on the institutional side.

Anyways take it with a grain of salt because predicting the future is a foggy endeavor but if I had to wager I would say the odds are with the status quo.
"Lethargy bordering on sloth remains the cornerstone of our investment style."
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Gregmal

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Re: Are big banks value traps
« Reply #8 on: October 04, 2019, 10:07:18 PM »
I'm playing devils advocate here but I think you guys underestimate the banking business, particularly in today's world.

Calling the banks stodgy or tech-averse is superficial IMHO. Banks are not tech averse, they are incredibly financially disciplined (it's their raison d'etre!). These are not VC shops looking to cash in by inventing the next best tech.

Additionally you are ignoring the regulatory component. The FRB will be so far up a new bank's colon that it's too painful to think of. The large banks took 10 years to comply with FRB/OCC matters. And they are still not done.

Citi, Wells, JPM all have over 200,000 employees, each. Google and apple have half that. Simply to bring on the kind of manpower needed will be a billion dollar endeavor.

It is not just 'lets build some credit models and start slingin' cards". On the models side, these banks have 2, 3, 4 thousand models each. Who is going to build these? Who is going to validate them? How long is that going to take? It is not feasible. And the people building these models - they are not cheap. We billed out at 600, 700 an hour for regulatory models, not even valuation models which are much more important. And then you need a validation group which again, is incredibly not cheap.

Then you need to integrate into the markets. On the consumer side, now you need instantaneous scoring services at a massive scale and you need retail partners to integrate it. Retail partners who are already being serviced by these large banks and at a lower cost than you can provide. And these banks and policy teams who know these business better than you (and they) do. This is not just incredibly expensive but a hell of an endeavor to start from scratch. Systems migrations take two years - and that's a migration.

On the institutional side, it's even more opaque. First you have no idea what these product which are being traded. Show me anyone at Apple or Google who can explain why Kirk's spread option model is conceptually unsound but under what circumstances it is still acceptable to use. Nobody. Now tell me who is going to figure that out and then design a systems application to price certain products with certain models under specific circumstances. Of course you can use vendors to tap into the market in this way but the regulators will destroy you. And they're expensive as hell and there's a reason all the banks have migrated to in-house solutions. So unless you want to lose money on every trade for 4-5 years until you can build your own system to migrate over from a vendor platform, you're out of luck.

This article: https://seekingalpha.com/article/2561895-apple-pay-has-long-term-implications-for-visa-mastercard-and-retail-banks
postulates that Apple is entering the retail payments sphere as a means to enter the financial industry at a whole.
Well look at the payments - has Apple or Stripe built their own systems? No, they are playing on top of the established rails. Maybe this will change but it is difficult to see why. To build out such a system is incredibly expensive and the payoff is very uncertain. Expected ROI today is almost certainly very negative. And V/MC and the banks are expected to sit tight while this happens? I think not. Even if Apple or Google does go down this road they are opening themselves up to so many costs it will be absolutely brutal and the banks will slaughter them on the institutional side.

Anyways take it with a grain of salt because predicting the future is a foggy endeavor but if I had to wager I would say the odds are with the status quo.

I typically like to bust your balls; so I will. Congrats on your first useful investment related post.

On a serious note, you are 1,000% right here.

LC

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Re: Are big banks value traps ?
« Reply #9 on: October 04, 2019, 10:22:11 PM »
It's like Phil Fisher said...invest in what you know. Explains your portfolio of weed stocks and roadside greek diners   ;D
"Lethargy bordering on sloth remains the cornerstone of our investment style."
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