Author Topic: Are big banks value traps ?  (Read 9924 times)

writser

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Re: Are big banks value traps ?
« Reply #10 on: October 05, 2019, 02:00:32 AM »
It's like Phil Fisher said...invest in what you know. Explains your portfolio of weed stocks and roadside greek diners   ;D

And divorce litigation.
When you are dead, you do not know you are dead. It's only painful and difficult for others. The same applies when you are stupid.


SharperDingaan

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Re: Are big banks value traps ?
« Reply #11 on: October 05, 2019, 06:29:31 AM »
It's like Phil Fisher said...invest in what you know. Explains your portfolio of weed stocks and roadside greek diners   ;D

Finally .... my kind of portfolio!

Couple of add-on's ...

Banks aren't going away, it's just the form that is changing. Brick/mortar branches exist because a lot of product requires a physical facility (sales force, ATM cash dispenser, etc,). There is only so much that you can do via the on-line channel; and any material change in your employment mix will typically require some kind of regulatory approval. Try dropping 10,000 bodies at once, and see what happens.

An Apple Pay, Google Pay, etc has clear cost/tech payment advantages over any nations banking industry payment rails. But, the reality is that their global competitiveness is meaningless in a environment of separate local regulatory regimes. You may process differently, but it's our sand-box, and our rules.

The Apple Pay, Google Pay, etc, bring networking power to the table, and it is clearly advantageous - but it's not enough.
Far better for everyone if Apple Pay, Google Pay, etc were replaced by Central Bank Pay - and payments were made in Central Bank token, automatically exchanging into local currencies whenever there is a cross-border payment. And better still; if all participants had to have a digital wallet at their home Central Bank; and all transactions were using blockchain/smart-contracts on a 'private' central bank network. Ruins your day if you're trying to money-launder.

Just like the prostitution, arms-dealing, and drug trades - the product may change, but the industry stays.

SD



« Last Edit: October 05, 2019, 11:27:37 AM by SharperDingaan »

CorpRaider

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Re: Are big banks value traps
« Reply #12 on: October 05, 2019, 07:50:01 AM »
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?

Network effects + regulatory capture imop.

Jurgis

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Re: Are big banks value traps
« Reply #13 on: October 05, 2019, 08:36:44 AM »
Credit cards

You said "credit cards" twice now. Please tell what non-big-bank CCs have any penetration. That Goldman Sachs Apple card does not count really.  8)
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John Hjorth

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Re: Are big banks value traps ?
« Reply #14 on: October 05, 2019, 10:03:34 AM »
... There is only so much that you can do via the on-line chanel; and any material change in your employment mix wii typically require some kind of regulatory approval. Try dropping 10,000 bodies at once, and see what happens. ...

Just like the prostitution, arms-dealing, and drug trades - the product may change, but the industry stays.

SD

SharperDingaan,

SAN [relatively] did exactly that in May this year.

In Europe there's no way around this ... - only the way through it - by doing it - because of relatively more intense pressure on European earnings margins compared to in the US.

Head count reductions goes hand in hand with digitalization.
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sundin

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Re: Are big banks value traps ?
« Reply #15 on: October 05, 2019, 11:14:32 AM »
When ATM's had large growth in the 90's - some thought that the ATM was the "future bank" and would be a big disruptor, instead it lowered costs and made retail banking more operationally efficient. The banks forecast this same cost savings with digital technology.   

As mentioned here, the banking business is complex and protected by a moat of regulation when it comes to actual lending and deposits. The regulation + large amount of capital required to actually compete with the banks is enormous. Mobile/online banking is still largely a transactional medium (mobile remote deposit/e-transfers/bill payment etc vs. savings/ direct deposits/mtgs/helocs etc)
 
To protect their moat in the brokerage business - Jamie Dimon preemptively took away brokerage fees earlier this year and Schwab/AMTD did the same this past week. This ultimately makes ROI on this business a lot lower but at the same time protects cash deposits in the brokerage accounts (obviously declining NIMs don't help here either).

The payments business for the banks vs tech will be an interesting space. I see this playing out similar to ATMs.  Ie. Cardtronics/Diebold will partner w/ big banks via their large distribution network and reach rather than having their own payment businesses - which is a win/win for both.
« Last Edit: October 05, 2019, 11:16:30 AM by sundin »

SharperDingaan

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Re: Are big banks value traps ?
« Reply #16 on: October 05, 2019, 12:11:30 PM »
... There is only so much that you can do via the on-line chanel; and any material change in your employment mix wii typically require some kind of regulatory approval. Try dropping 10,000 bodies at once, and see what happens. ...

Just like the prostitution, arms-dealing, and drug trades - the product may change, but the industry stays.

SD

SharperDingaan,

SAN [relatively] did exactly that in May this year.

In Europe there's no way around this ... - only the way through it - by doing it - because of relatively more intense pressure on European earnings margins compared to in the US.

Head count reductions goes hand in hand with digitalization.

Fully agree.
But I would also add that in most cases - the employee mix should be no more than 40/60 permanent versus contract staff (measured on total cost, not head-count). To compete effectively, a bank has to be able to rapidly adapt cost structures to meet current (& projected) conditions.

The reality however is that the banking sector has material Corporate Social Responsibility (CSR) restraints, and national regulators/unions enforce them; any individual banker who doesn't 'get' this - is just quietly replaced. Banks are allowed to drop large numbers of permanent staff, but they have to pay severances well above the going rate, and wherever practical - execute the redundancy over an extended period vs all at once. There is more flexibility with contractors, subject to bleeding them off (not renewing contracts) at a reasonable rate.

And then there are the 'trading banks'.
If you think your trading job is at risk, the bank takes on your 'agency' risk. But if entire risk 'divisions' are on-the-bubble - isn't the 'collectively' smart thing to do, to just bet the bank?, then keep the positions from blowing up until after bonuses and severances have been paid? Following which you would just short the bank as soon as you're on the street - in anticipation of a blow-up, and a second pay-day ;)

Understand the cycle, and you can position yourself accordingly. 

SD
« Last Edit: October 05, 2019, 12:32:44 PM by SharperDingaan »

gfp

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Re: Are big banks value traps
« Reply #17 on: October 05, 2019, 12:21:06 PM »
Didn't ask me, but depending on your definition of "big banks" (I think of this being JPM, BAC, C and WFC) the names that come to mind are Capital One, American Express and Discover Financial.

Credit cards

You said "credit cards" twice now. Please tell what non-big-bank CCs have any penetration. That Goldman Sachs Apple card does not count really.  8)

Jurgis

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Re: Are big banks value traps
« Reply #18 on: October 05, 2019, 02:23:15 PM »
Didn't ask me, but depending on your definition of "big banks" (I think of this being JPM, BAC, C and WFC) the names that come to mind are Capital One, American Express and Discover Financial.

Credit cards

You said "credit cards" twice now. Please tell what non-big-bank CCs have any penetration. That Goldman Sachs Apple card does not count really.  8)

These all are "big banks" for me.

Edit: but you are right, this thread is not very well defined. Spek starts with talking about both big banks and small banks. He also talks about brokers taking bank business, but some of the banks own brokers and some of the brokers are banks more or less. So it's not clear if the claims are that just big banks will lose market X (mortgages, CCs, whatever) or whether both big and small banks will lose it, or whether "lose it" is overall applicable if business goes from a bank to a bank-like company like Cap One or AmEx or DFS or Schwab or E-Trade or ???. Is it about "classic" banks losing to really-not-bank-fintech companies?
Or Spek's "mortgage broker" example - that example is mostly broken, since "mortgage broker" mostly sells the mortgages to big - or not so big - banks. My mortgages were sold to Chase, BAC, Webster, but also the "not-very-bank-but-also-not-new-fintech" companies like Nationstar.

So overall, I think claims in the thread are pretty washed out and not consistent. 8)

If the thread is just about the SuperBig (JPM, BAC, C and WFC) losing to any-other-companies (smaller banks, broker-banks, non-banks, techs, etc), then I don't see that either. I can argue that SuperBig won't grow very fast, but that's kinda tautology because they are so big and their growth is mostly limited by size and regulations. I don't think they are melting ice cubes though. So unlikely to be value traps based on that. Unless you'd call anything that returns a single digit return a value trap.  8)
« Last Edit: October 05, 2019, 02:46:43 PM by Jurgis »
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wabuffo

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Re: Are big banks value traps ?
« Reply #19 on: October 05, 2019, 05:22:36 PM »
I think the banking sector isn't going anywhere and will consolidate more and more towards the bigger banks.  All depository institutions are agents of the Federal Reserve.  That is why their deposits (up to a certain amount) are guaranteed by the Fed (and US Treasury).   You have to think of the banking sector as a vital connector of the US Treasury/Federal Reserve on one side and the private sector on the other.   There are two things that create deposits in the banking sector.  The first is lending - a new loan creates a new deposit (reserves aren't as necessary anymore).  The second factor that creates deposits in the banking sector is net deficit spending by the US Treasury.  When the US Treasury spends, it credits an account at a bank via the Federal Reserve.  These two factors create an ever growing deposit base in the US banking sector.

These are irreversible trends IMO (my data goes back til 2003).

1) Deposits in the US banking sector continue to grow year-after-year.  By my calculations, deposits have grown +5.6% per year since 2003 to today.  Total US banking deposits were $5.7 T USD in 2003, they are over $14.0 T USD today.

2) The market share of the biggest banks in terms of share of total US banking sector deposits continues to grow year-in-year out at the expense of small banks.  The Big 3 deposit banks (JPM, WFC, BAC) had 14% share of total deposits in 2003, they are at over 32% in 2019.  Over and above the normal growth of deposits in the US banking sector, deposit growth at the big 3 has been +9.1% per year since 2003.   The big 3 have grown deposits by 4.25X in 16+ years.

In addition, one of the keys is that the big banks are central to the payments system through which the economy operates.  This payments system is in turn tied to the US Federal Reserve.  Banks clear payments with each other every day in the tens of trillions of dollars.  They often need overdrafts with the Fed while they wait for clearing.  I've seen stats that show that reserves at the Fed swell intra-day by a factor of 10-15x until they are netted and cleared at the end of each 24 hour period.  We're talking $10T per day or more.  This is not going to get replaced by Apple or Bitcoin, IMHO. 

I don't think banks are going anywhere nor does the central bank want to eliminate them.  I also think that the big banks will get bigger over time despite the charm of the local community bank. 

wabuffo
« Last Edit: October 05, 2019, 05:29:25 PM by wabuffo »