Author Topic: Are big banks value traps ?  (Read 38050 times)

Spekulatius

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Re: Are big banks value traps ?
« Reply #170 on: September 06, 2020, 09:35:41 AM »
This is correct, but a better way to play rising interest rates in clean way is to buy SCHW (I own a little). No issues with credit risk, Fed interfering but somewhat sensitive to asset valuations. It’s higher valued but also a better business than banking, imo.

Are you not worried about their history of dilutions from 2009 to 2018?

Dilution was about ~1% annually since 2012. That hardly breaks an investment thesis considering that they had some decent organic growth.
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LearningMachine

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Re: Are big banks value traps ?
« Reply #171 on: September 06, 2020, 10:06:55 AM »
This is correct, but a better way to play rising interest rates in clean way is to buy SCHW (I own a little). No issues with credit risk, Fed interfering but somewhat sensitive to asset valuations. It’s higher valued but also a better business than banking, imo.

Are you not worried about their history of dilutions from 2009 to 2018?

Dilution was about ~1% annually since 2012. That hardly breaks an investment thesis considering that they had some decent organic growth.

You're right dilutions slowed down in 2012.  Maybe I should rethink my mental model, but I find constant dilutions a sign of management willing to steal from shareholders, and that can show up in other ways also in not being shareholder friendly long-term, e.g. when push comes to shove, for management to save their jobs, if they need to dilute like crazy, they will do it.   Also, I don't like that they are so highly leveraged with a low CET1 - very close to being taken over by regulators if they get any losses.

Spekulatius

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Re: Are big banks value traps ?
« Reply #172 on: September 06, 2020, 10:59:27 AM »
This is correct, but a better way to play rising interest rates in clean way is to buy SCHW (I own a little). No issues with credit risk, Fed interfering but somewhat sensitive to asset valuations. It’s higher valued but also a better business than banking, imo.

Are you not worried about their history of dilutions from 2009 to 2018?

Dilution was about ~1% annually since 2012. That hardly breaks an investment thesis considering that they had some decent organic growth.

You're right dilutions slowed down in 2012.  Maybe I should rethink my mental model, but I find constant dilutions a sign of management willing to steal from shareholders, and that can show up in other ways also in not being shareholder friendly long-term, e.g. when push comes to shove, for management to save their jobs, if they need to dilute like crazy, they will do it.   Also, I don't like that they are so highly leveraged with a low CET1 - very close to being taken over by regulators if they get any losses.

Well, I don’t like dilution either, but one needs to look in more detail. There are cash proceeds from stock Option excercises for example that reduce the effective dilution.

Some mature SAAS companies (WDAY being a prime example) dilute their shareholders by 6-7% annually through stock based comp - that’s really a significant economic impact.

As for Schwab though, I think the dilution has destroyed less value than WFC overeager share buybacks for example.
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fareastwarriors

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Re: Are big banks value traps ?
« Reply #173 on: September 30, 2020, 03:56:21 PM »
Federal Reserve Board announces it will extend for an additional quarter several measures to ensure that large banks maintain a high level of capital resilience

https://www.federalreserve.gov/newsevents/pressreleases/bcreg20200930b.htm

Due to the continued economic uncertainty from the coronavirus response, the Federal Reserve Board on Wednesday announced it will extend for an additional quarter several measures to ensure that large banks maintain a high level of capital resilience.

For the fourth quarter of this year, large banks—those with more than $100 billion in total assets—will be prohibited from making share repurchases. Additionally, dividend payments will be capped and tied to a formula based on recent income. The capital positions of large banks have remained strong during the third quarter while such restrictions were in place.

In June, the Board released the results of its annual stress test and additional analysis, which found that all large banks were sufficiently capitalized. Nonetheless, in light of the economic uncertainty, the Board put several restrictions in place to preserve bank capital, which provides a cushion against loan losses and supports lending. Later this year, the Board will conduct a second stress test to further test the resiliency of large banks. Results will be released by the end of the year.

Spekulatius

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Re: Are big banks value traps ?
« Reply #174 on: October 14, 2020, 09:23:52 AM »
Interesting fact about NIMs ( Q2/Q32020):
Lloyd ( UK ): 2.4%
WFC: 2.13%
BAC:  1.72%
JPM:: 1.75%

All those banks NIM are being reduced by a flood of deposits. BAC and JPM have a lot of non- interest income, WFC not so much.

Years ago, I looked at Brit and Irish banks and thought : “ Are banks with NIM < 2% really worth owning?”. Now here we are...
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wabuffo

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Re: Are big banks value traps ?
« Reply #175 on: October 14, 2020, 10:56:38 AM »
Spek - I like to dig beyond the NIM margins.  Banks have different business models that entail other sources of income (and expense). 

One of the banks I like is USB (though I don't own it).  They have built a significant non-lending related business that compliments their core lending operations. It involves selling other services to its banking customers (eg, wealth mgmt) as well as adding ancillary services that depend on connectivity to ATMs/VISA & MC interchange systems that only a bank can provide (payment systems, open-loop prepaid debit card services). The result is the generation of significant levels of fee income that don't depend on direct lending. When that non-interest income is added to a culture of very strong cost controls, it creates some competitive advantages.

You can see these advantages in the numbers. I will ignore provisions for credit losses and just look at pre-provision, pre-tax income (PPPT).  I will also ignore a big bank like JPM that has a large investment bank attached since its non-interest income is volatile.  Here's the numbers for the Q2, 2020.



I've also attached a snapshot of Meta Financial (my favorite small bank and only bank stock that I hold).  I think it is a bank to watch as it shifts its business model and really leverages its market-leading strength in open-loop prepaid debit cards.  Of course, one quarter's results probably isn't a deep enough analysis and this should be looked at over time.

wabuffo


Viking

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Re: Are big banks value traps ?
« Reply #176 on: October 14, 2020, 11:47:46 AM »
So BAC has a market cap of $207 billion. It has something like $35 billion in excess capital; likely $20 billion it does not need?

- In Q3 it earned $5 billion.
- Expects net interest income has hit low point. Flat to up slightly in Q4 and flat to up slightly in 2021
- expects expenses in Q4 of $13.7 billion. $3-$400 million due to covid which should come out in 2021 (mostly back half).
- expect delinquencies to push to mid 2021; consumer is doing better than models predict.
- dividend yield is almost 3% and dividend is safe

Business has been remarkably resilient in 2020. Very different than what happened in 2008-2012.

Stock looks cheap at under $24. But where does economy and earnings and capital return go from here?

hyten1

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Re: Are big banks value traps ?
« Reply #177 on: October 14, 2020, 11:50:47 AM »
this market is getting out of hand, the market cap of TSLA ~= BAC + C + WFC +GM ?!?!

the combine net income of these companies is more than DOUBLE tsla's sales

DooDiligence

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Re: Are big banks value traps ?
« Reply #178 on: October 14, 2020, 01:43:28 PM »
this market is getting out of hand, the market cap of TSLA ~= BAC + C + WFC +GM ?!?!

the combine net income of these companies is more than DOUBLE tsla's sales

I like my chances with this dislocation.
AFL // BRK.B // CLB // EW // GPC // MO // NVO // PSX // TPL // VDE // VLGEA // WFC

Investable cash 22.9% + 25 months of survival ca$h

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John Hjorth

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Re: Are big banks value traps ?
« Reply #179 on: October 14, 2020, 02:42:05 PM »
this market is getting out of hand, the market cap of TSLA ~= BAC + C + WFC +GM ?!?!

the combine net income of these companies is more than DOUBLE tsla's sales

I like my chances with this dislocation.

Hyten & Jeff,

Yeah, the whole market proposition appear [humm-hooo!] twisted right now. No real connection between earnings and expected earnings vs. price in so many sectors.

Banks in general appear cheap on metrics, also certain kind of real estate. To me, the issue at hand for banks is that they have - in general - absolutely no clue about how much money they will loose related to pandemic business restrictions. [Simply, just "caught with their trousers down" & "don't know" - but "will learn along the way".]
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