Author Topic: Are big banks value traps ?  (Read 10047 times)

LC

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Re: Are big banks value traps ?
« Reply #20 on: October 05, 2019, 07:39:51 PM »
Quote
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. 
Bingo. In terms of the Charlie Munger generalized mental models - this is one of the top models you should have in your mind when thinking of the banks. They do "the dirty work" of the central bank.
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Spekulatius

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Re: Are big banks value traps
« Reply #21 on: October 06, 2019, 07:56:07 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)

Discover, Amex are non- bank offerings. To be fair, this one went more towards the banks, because CC vendors benefit from cheap and stable funding. Whether this remains this way, is another question.
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Jurgis

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Re: Are big banks value traps
« Reply #22 on: October 06, 2019, 09:26:36 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)

Discover, Amex are non- bank offerings. To be fair, this one went more towards the banks, because CC vendors benefit from cheap and stable funding. Whether this remains this way, is another question.

Actually, they are both bank offerings ( https://en.wikipedia.org/wiki/Discover_Financial https://en.wikipedia.org/wiki/American_Express#Individual_banking ). But I've answered similar comment above.
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TwoCitiesCapital

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Re: Are big banks value traps
« Reply #23 on: October 06, 2019, 12:42:40 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 doesn’t mean it won’t 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.

Crypto markets don't make credit analysis unnecessary. They'll make the banks record keeping cheaper via block chain technology, but won't make individuals any more savvy or willing to do credit analysis for such a small pay-back.

I, personally, have no desire to do credit research on an individual to loan them money for 30 years to finance their mortgage so I can make 3.75%.

I'd much rather sit on my ass and earn 2.25% for doing nothing, and have access to the money any time I need, and let the bank collect the spread from my deposits vs their loans and deal with the liquidity management.

Crypto currency isn't going to change this dynamic one iota IMO.

DooDiligence

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Re: Are big banks value traps
« Reply #24 on: October 06, 2019, 03:50:50 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 doesn’t mean it won’t 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.

Crypto markets don't make credit analysis unnecessary. They'll make the banks record keeping cheaper via block chain technology, but won't make individuals any more savvy or willing to do credit analysis for such a small pay-back.

I, personally, have no desire to do credit research on an individual to loan them money for 30 years to finance their mortgage so I can make 3.75%.

I'd much rather sit on my ass and earn 2.25% for doing nothing, and have access to the money any time I need, and let the bank collect the spread from my deposits vs their loans and deal with the liquidity management.

Crypto currency isn't going to change this dynamic one iota IMO.

Yep & yep.

Crypto will be useful for frictionless internal transaction, though.

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Viking

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Re: Are big banks value traps ?
« Reply #25 on: October 06, 2019, 11:17:53 PM »
“...big banks may be the department store equivalent of the financial industry.”

Spekulatius, thanks for posing the question as it has been rattling around in my mind as well.

The banks in Europe look to be value traps. In my mind this is driven primarily by their economy and the ECB response/policies (negative interest rates).  A secondary reason is their inability to achieve greater scale as there is no appetite or synergies with cross-border mergers.

I really like the US big banks. The industry is undergoing dramatic change and I think these are benefitting the very big banks as scale seems to be very important.  My primary concern with the US big banks is trying to understand if negative interest rates are coming to the US.   If the US, in response to economic weakness and potential deflation, resorts to European style monetary policy (negative interest rates) then this will be negative for earnings for the big US banks. This could play out over many years and result in poor earnings growth and flat stock price (value trap). You are already seeing slowing earnings (as NIM falls); the big banks are relying more and more on share buy backs to show growth in earnings per share. And times are very good for the big US banks right now... what happens when times are not good (lower NIM and higher credit costs)?
« Last Edit: October 06, 2019, 11:26:51 PM by Viking »

Spekulatius

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Re: Are big banks value traps ?
« Reply #26 on: October 07, 2019, 05:28:59 PM »
Pretty timely interview with Mike Mayo regarding banks and technology:
https://finance.yahoo.com/video/wells-fargos-mike-mayo-banking-152840836.html

Sounds like he is reasonably optimistic on banks.
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Viking

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Re: Are big banks value traps ?
« Reply #27 on: October 07, 2019, 11:42:09 PM »
Pretty timely interview with Mike Mayo regarding banks and technology:
https://finance.yahoo.com/video/wells-fargos-mike-mayo-banking-152840836.html

Sounds like he is reasonably optimistic on banks.

Great video. I liked his comment that, yes, revenue growth was slowing but as long as expense growth was lower the big banks would continue to post solid earnings. And it was their massive investmemts in technology that would allow them to continue to bring down expenses.

I think he said 200,000 jobs to come out of the financial industry in the next 10 years (right timeframe)? Expect bank expense ratios to continue falling for many years.

JEast

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Re: Are big banks value traps ?
« Reply #28 on: October 08, 2019, 06:19:29 AM »
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 years only culminating at the end of the dot-com era.  Then low interest rate gave them another run until 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 to spend $500m a year on cybersecurity).
    • IFSR9 implications are pro-cyclical (booking loan losses up front) so the downturn when it comes will be less worrisome not to mention the overcapitalization of most banks now. 
    • Also, Buffett gave a big thumb up to banking with his BAC conversion in ’17 and Dimon says it is just the sixth inning in early ‘19.
There used to be a metric in the cellphone industry that each customer was worth $1,200 (if memory serves) for the life of a customer, usually less than 5-years.  For a bank, what is the customer life?  If you open a checking account and keep it for two-years, you are a probably with that bank for 30+ years! Even with all the baggage of bad press, etc… WFC opened up over 500k new checking accounts in the first six-months of 2019, and other big banks were positive too.  What are those customers worth?

Big banks may not perform for innings 6-9, but they do not appear to be value traps as they are adding value by capturing more of the pie.  We just need to figure out how much pie there will be in five years.

wabuffo

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Re: Are big banks value traps ?
« Reply #29 on: October 08, 2019, 09:21:04 AM »
If you open a checking account and keep it for two-years, you are a probably with that bank for 30+ years! Even with all the baggage of bad press, etc… WFC opened up over 500k new checking accounts in the first six-months of 2019, and other big banks were positive too.  What are those customers worth?

I think even more than deposits, the big banks dominate credit card usage.   The most important asset for a bank is the front-of-wallet credit card.  It has most of the spend and the least amount of losses.  The second and third cards in the wallet are statistical losers - they only get used when no 1 card is maxed out and therefore have a higher loss rate. 

In addition to being super-profitable for the banks, the front-of-wallet credit card tends to be very sticky and usually ties the user to other bank services.  If you look at what is happening in the loyalty business with airline frequent flyer miles and what airlines/banks are paying to repatriate them you can tell just how important to the big banks credit cards are (the banks often pay upfront large payments to continue to tie their credit cards to the airline loyalty program).

Having said that - I think deposits continue to grow 3-4% per year for the US banking industry with continued consolidation allowing the big 3 banks (WFC, BAC, JPM) to grow deposits even faster.  Its why Buffett loves the big three banks as investments - they have a big tailwind.

wabuffo

« Last Edit: October 08, 2019, 09:22:45 AM by wabuffo »