Are big banks value traps ?

[scorpioncapital]

I have a feeling brokerage firms are at intersection of payment services and banking. In fact if banks ever go negative in rates brokerage firms may offer lower borrow costs and higher interest rates. If this is so I think brokerage firms may be able to substitute a vast amount of function of the bank at the consumer level.

[TwoCitiesCapital]

I have a feeling brokerage firms are at intersection of payment services and banking. In fact if banks ever go negative in rates brokerage firms may offer lower borrow costs and higher interest rates. If this is so I think brokerage firms may be able to substitute a vast amount of function of the bank at the consumer level.

I disagree. Brokerages can certainly collect deposits - but they've shown an unwillingness to pay decent returns on it by moving from money markets to bank deposit sweeps as the default options.

In other words, brokerages have obviously expressed a preference to move deposits held BACK to banks in exchange for fees for those banks.

Further, there is limited lending brokerages can engage in outside of securities Based lending. Mortgages/personal loans/auto loans/etc for those who don't have the cash/securities to cover those expenses would be non-existent.

Banks still win here and brokerages are demonstrating that by sending current deposits straight back to banks.

[John Hjorth]

Natural Park Service - Gates of the Arctic - Muskox: Circle Defense.

[John Hjorth]

Mastercard [June 25th 2015: Press Releases - Mastercard and P27 Nordic Payments Platform to build a world first real-time payments system across the region.

Now exactly that press release made me relate to what has been posted here on CoBF by Spekulatius earlier. [No link here, but i'll dig it up, if needed]. In short : Wake up, [not as a an investor, more like as a citizen] or you're destined to fall behind.

There are no cheques bouncing around here in Denmark, now for years. Simply because the whole chequing account system was put into run-off YE2016 [If IRC, with a 3 months run-off period.]. Pretty much the most cost intensive and the most cumbersome system - ever - to carry cash from A to B.

[Spekulatius]

I think one takeaway from this is that technological prowess matter more so in the past for banks. In the US, I consider BAC and JPM the leader followed by WFC. WFC really was the best bank in terms of how they managed their branches, but I think this is now much less and advantage than it has been in the last. A lot of regional and small banks are going to be in trouble.

A lot of the larger credit unions are doing well. I am member with a few and many have grown their balance sheet organically by ~10% annually since the Great Recession. They have certainly taken market share, probably from smaller banks. Credit unions tend to have very few, but larger branches, which plays well into going online and doing just doing the transactions requiring consulting in the branches.

[JEast]

The big banks reported this week and nearly all exceeded expectations and reported that the consumer is strong with exceptional credit. 

The big banks indicated they will continue to gather more deposits (market share) in a low rate environment and appears to be true as BAC opened up 700k (net) checking accounts so far this year.

[wabuffo]

The big banks indicated they will continue to gather more deposits (market share) in a low rate environment

It also appears that the big banks (led by Jamie Dimon) used the September repo melt-down to get the bank regulators to loosen up on what the preferred collateral for meeting the new Liquidity Coverage Ratio regs will be allowed.  They will be freer to use the cash they have on deposit at the Fed in order to provide liquidity to repo markets (and who knows where else). 

Bank regulators were leaning on the banks to use reserves only (and not other zero-credit risk assets like Treasuries) to meet the LCR stress test regulations.  While both cash on deposit at the Fed (reserves) and Treasuries are zero credit risk, regulators worried that in a crisis, Treasuries had some price risk - ie, a stressed bank would not be able to sell them at 100-cents on the dollar.  Cash on deposit at the Fed has no price risk - its cash!.   That's why once reserves dropped to a certain lower level from the Fed's Quantitative Tightening, the banks could only sit on their hands and watch while repo rates spiked to almost 10% in mid-Sept.  They believed that the regulators wanted this cash to stay at the Fed.

An article in Reuters today says that bank regulators are loosening up and permitting Treasuries (in addition to reserves) in meeting LCR.  This frees up the big banks to deploy more of their cash excess reserves.  This is probably positive for big bank earnings.  They will continue to see rising deposits and it looks like they will be allowed to hold a lower percentage of their assets as cash deposited at the Fed earning a low return.

https://www.reuters.com/article/us-usa-banks-rates-exclusive/exclusive-wall-street-banks-see-green-light-from-fed-on-reserves-sources-idUSKBN1WW2T6

wabuffo

[cameronfen]

So I think I argued in the WFC thread a while ago that big banks are at risk of losing their moat because there is so much fintech that is basically modularizing everything that big banks do.  For example if you want a loan you can now go to Quicken, or Lending Tree.  If you want to buy stocks, discount broker (or even a safe place to deposit money).  You want to perform an electronic payment transaction you can now work around banks with things like Paypal, venmo, Alipay.  If you want deposits, there are challenger banks going all electronic that have no branches willing to give you higher interest deposits and lower interest loans.  I think I made a big point on challenger banks. 

I wanted to point out that it looks like challenger banks and other fintech looking to disrupt how banks do business are running into more difficulty overcoming the regulation that big banks use as moats.  For example, see here:

https://www.ft.com/content/77ef93ec-e100-11e9-9743-db5a370481bc

Goldman Sach's Marcus is also having trouble:

https://www.pymnts.com/earnings/2019/red-ink-marks-marcus-and-goldmans-risky-consumer-bet/

As is Facebook's Libra which is well known. 

Anyway, my point is that my position on this whole thing has evolved as I got more information (as well as discussions on the WFC thread).  I think modularization is still a thing, and it will take big banks like ten years to have an as efficient cost structure as these challenger banks (as they have to close down branches and build up an entirely online deposit base) and other non-bank entities.  But thus far, it seems like the big bank moats are holding up and preventing even the low-cost producers from taking significant share.  I still wouldn't be long WFC though, as a lot of other big banks are further along in closing branches than WFC and will have a cost advantage for the foreseeable feature. 

[plato1976]

It will take decades to disrupt the current bank business model;
so a bank like BAC still has time to grow through share buy back, and then begin to issue fat div when the valuation is high;
I think they have enough time to generate shareholder value before the business model goes obsolete

Also, we cannot exclude the possibility that the transition is so slow that those big banks adapt to the new world successfully

So I think I argued in the WFC thread a while ago that big banks are at risk of losing their moat because there is so much fintech that is basically modularizing everything that big banks do.  For example if you want a loan you can now go to Quicken, or Lending Tree.  If you want to buy stocks, discount broker (or even a safe place to deposit money).  You want to perform an electronic payment transaction you can now work around banks with things like Paypal, venmo, Alipay.  If you want deposits, there are challenger banks going all electronic that have no branches willing to give you higher interest deposits and lower interest loans.  I think I made a big point on challenger banks. 

I wanted to point out that it looks like challenger banks and other fintech looking to disrupt how banks do business are running into more difficulty overcoming the regulation that big banks use as moats.  For example, see here:

https://www.ft.com/content/77ef93ec-e100-11e9-9743-db5a370481bc

Goldman Sach's Marcus is also having trouble:

https://www.pymnts.com/earnings/2019/red-ink-marks-marcus-and-goldmans-risky-consumer-bet/

As is Facebook's Libra which is well known. 

Anyway, my point is that my position on this whole thing has evolved as I got more information (as well as discussions on the WFC thread).  I think modularization is still a thing, and it will take big banks like ten years to have an as efficient cost structure as these challenger banks (as they have to close down branches and build up an entirely online deposit base) and other non-bank entities.  But thus far, it seems like the big bank moats are holding up and preventing even the low-cost producers from taking significant share.  I still wouldn't be long WFC though, as a lot of other big banks are further along in closing branches than WFC and will have a cost advantage for the foreseeable feature.

[cameronfen]

It will take decades to disrupt the current bank business model;
so a bank like BAC still has time to grow through share buy back, and then begin to issue fat div when the valuation is high;
I think they have enough time to generate shareholder value before the business model goes obsolete

Also, we cannot exclude the possibility that the transition is so slow that those big banks adapt to the new world successfully

So I think I argued in the WFC thread a while ago that big banks are at risk of losing their moat because there is so much fintech that is basically modularizing everything that big banks do.  For example if you want a loan you can now go to Quicken, or Lending Tree.  If you want to buy stocks, discount broker (or even a safe place to deposit money).  You want to perform an electronic payment transaction you can now work around banks with things like Paypal, venmo, Alipay.  If you want deposits, there are challenger banks going all electronic that have no branches willing to give you higher interest deposits and lower interest loans.  I think I made a big point on challenger banks. 

I wanted to point out that it looks like challenger banks and other fintech looking to disrupt how banks do business are running into more difficulty overcoming the regulation that big banks use as moats.  For example, see here:

https://www.ft.com/content/77ef93ec-e100-11e9-9743-db5a370481bc

Goldman Sach's Marcus is also having trouble:

https://www.pymnts.com/earnings/2019/red-ink-marks-marcus-and-goldmans-risky-consumer-bet/

As is Facebook's Libra which is well known. 

Anyway, my point is that my position on this whole thing has evolved as I got more information (as well as discussions on the WFC thread).  I think modularization is still a thing, and it will take big banks like ten years to have an as efficient cost structure as these challenger banks (as they have to close down branches and build up an entirely online deposit base) and other non-bank entities.  But thus far, it seems like the big bank moats are holding up and preventing even the low-cost producers from taking significant share.  I still wouldn't be long WFC though, as a lot of other big banks are further along in closing branches than WFC and will have a cost advantage for the foreseeable feature.

Yes that is generally the conclusion I was trying to convey.  Its a threat to the moat, but likely the big banks will be okay especially BAC that is ahead of the curve on branch closings.  I think the problem is WFC which has the most branches per $deposit by a decent margin compared to the other banks which means even if they close at the same rate as other banks they are likely to be the high cost provider in what is generally a commodity business where the main advantage is cost (through historically economies of scale but branchesless bank is a different advantage).  My 2 cents.  I don't really invest in banks so weigh my opinions however you want.