Are big banks value traps ?

[ratiman]

 

Initially banks welcomed low rates . . . before low rates killed the banks. At 1/4 of what it was, hard to see banks going lower.

[UK]

https://www.bloomberg.com/news/articles/2020-05-12/fed-may-curb-banks-dividends-due-to-virus-crisis-quarles-says

[TwoCitiesCapital]

https://www.bloomberg.com/news/articles/2020-05-12/fed-may-curb-banks-dividends-due-to-virus-crisis-quarles-says

 

Honestly I think this is prudent.

 

I get why shareholders and free-market proponents would be frustrated here, but I'm in the camp that this will be MUCH worse than the market is currently anticipating and the last thing we need is to bail the banks out again in addition to the rest of the corporate sector.

 

Cutting dividends for 6-12 months until we have more clarity on a path forward and what ultimate defaults will be seems reasonable even if we anticipate the capital levels at banks are sufficient. This goes further to ensure that banks will be part of the solution/recovery instead of contributing to the problem. If after 6-12 months, dividend cuts are deemed unnecessary they can pay out the missed amount as a special div and repurchase a block of shares or something.

 

Either take direction from the gov't in exchange for leniency and assistance or do your own thing and be allowed to fail if that ends up biting you in the ass. I'm ok with either approach, but not this middle ground where we have leniency and bailouts for companies that did stupid shit and didn't leave themselves with enough financial flexibility to weather a bad environment.

[dcollon]

Talk about pro-cyclical, what was the reason for building up capital over all these years.  We are now going to say 11,10, 9% buffers are the threshold.

 

Amateur hour is here again.  Next we just need Nouriel Roubini back on CNBC say we should nationalize the banks. 

 

 

[Spekulatius]

https://www.bloomberg.com/news/articles/2020-05-12/fed-may-curb-banks-dividends-due-to-virus-crisis-quarles-says

 

Honestly I think this is prudent.

 

I get why shareholders and free-market proponents would be frustrated here, but I'm in the camp that this will be MUCH worse than the market is currently anticipating and the last thing we need is to bail the banks out again in addition to the rest of the corporate sector.

 

Cutting dividends for 6-12 months until we have more clarity on a path forward and what ultimate defaults will be seems reasonable even if we anticipate the capital levels at banks are sufficient. This goes further to ensure that banks will be part of the solution/recovery instead of contributing to the problem. If after 6-12 months, dividend cuts are deemed unnecessary they can pay out the missed amount as a special div and repurchase a block of shares or something.

 

Either take direction from the gov't in exchange for leniency and assistance or do your own thing and be allowed to fail if that ends up biting you in the ass. I'm ok with either approach, but not this middle ground where we have leniency and bailouts for companies that did stupid shit and didn't leave themselves with enough financial flexibility to weather a bad environment.

 

I actually agree that it is prudent to preserve capital. JPM actually did allude to this in their last CC, if one cared to listen and they are best capitalized or the three major banks.

 

FWIW, I bought a small starter in JPM at the close.

[LC]

This would all make sense if the FRB actually behaved like a prudent, conservative 'lender of last resort'

 

Rather than another of Trump's redheaded stepchildren with daddy's credit card.

 

I agree with dcollon. The banks are all around 11% CET1 capital. What exactly is this capital buildup for if not to weather situations like this?

[rb]

This would all make sense if the FRB actually behaved like a prudent, conservative 'lender of last resort'

 

Rather than another of Trump's redheaded stepchildren with daddy's credit card.

 

I agree with dcollon. The banks are all around 11% CET1 capital. What exactly is this capital buildup for if not to weather situations like this?

+1!

 

One of my biggest fears about banks (of which I own a lot) is not negative rates. But that the Fed actually knee caps banks.

 

Right now the Fed is acting like a Formula 1 winner, spraying liquidity all over the place. But eventually things will settle down and the Fed is gonna have to mop up all of this liquidity. All of the liquidity will find its way into the banking system. So they'll do it by raising reserve requirements. But the Fed also crowded out banks out of their markets by lending directly.

 

Maybe the banks will say fuck it and buy back a truckload worth of stock at that point. Who knows?

 

What do they say? May you live in interesting times?

[Viking]

https://www.bloomberg.com/news/articles/2020-05-12/fed-may-curb-banks-dividends-due-to-virus-crisis-quarles-says

 

Honestly I think this is prudent.

 

I get why shareholders and free-market proponents would be frustrated here, but I'm in the camp that this will be MUCH worse than the market is currently anticipating and the last thing we need is to bail the banks out again in addition to the rest of the corporate sector.

 

Cutting dividends for 6-12 months until we have more clarity on a path forward and what ultimate defaults will be seems reasonable even if we anticipate the capital levels at banks are sufficient. This goes further to ensure that banks will be part of the solution/recovery instead of contributing to the problem. If after 6-12 months, dividend cuts are deemed unnecessary they can pay out the missed amount as a special div and repurchase a block of shares or something.

 

Either take direction from the gov't in exchange for leniency and assistance or do your own thing and be allowed to fail if that ends up biting you in the ass. I'm ok with either approach, but not this middle ground where we have leniency and bailouts for companies that did stupid shit and didn't leave themselves with enough financial flexibility to weather a bad environment.

 

You can’t leave it up to the individual banks; most will feel the need to side with shareholders (and pay dividends). If a bank cuts their dividend they may get a run on the bank (crisis of confidence, deposit outflows, higher borrowing costs, downgrades etc) to go with a much lower share price.

 

If it needs to be done, do it all together (like they did with buybacks). If i was a shareholder i would want them to not pay a dividend until were through the worst of the current situation (until a vaccine was Ready).

[bci23]

The banks feel like a value trap to me. Kind of reminds me of 2007 when the CNBC pundits were pounding the table about how cheap the banks were at 7x earnings like Washington Mutual, Bear Stearns, Merrill Lynch. Yes they are better capitalized this time around but the tidal wave is much larger this time as well.

[mattee2264]

 

I think the concern is the spectre of deflation. You can see the impact that had on European and Japanese banks. In that kind of environment it is impossible for banks to earn their cost of capital so they should trade well below book value. So quite a lot of downside.

 

 

[thepupil]

Yes they are better capitalized this time around but the tidal wave is much larger this time as well.

 

If it is then BB credit  should be 2000-3000 spread instead of 750

 

It’s really difficult to reconcile a lot of pricing these days.

 

JNK is at $97, down 12% in price terms from peak a little less in total return because of coupons.

 

If you said, unemployment is going to 15%, people are going to talk about deflationary depressions, energy assets will be stranded and abandoned and become like coal where they have negative value,

 

how much are you going to lose in the year this happens  a high yield investor?

 

I would probably say price down 40-50 and total return -35-45.

 

The Fed stepped in, I know, but tell that to what people are expecting for credit losses at banks, or tell that to my cash rich REITs with long duration leases from IG tenants.

 

Why is unsecured corporate credit at its worst quality in decades trading where it secured highly regulated banks that have been de-risking for a decade going down like there’s no tomorrow.

 

I keep telling myself not to short again, but liquid junk credit seems stupidly priced

 

Typed on phone, I think you all get my point even if the above is a bit incoherent

[rb]

Exactly. It seems like for some reason the depression is coming on for banks and real estate. Basically the thesis is that people or entities are not gonna pay back their loans or rent, but they're gonna spray money on everything else.

 

I'm having a real hard time fitting that square through that round hole since everything we know until now is that people pay rent and mortgage before everything else.

[bci23]

The banks feel like a value trap to me. Kind of reminds me of 2007 when the CNBC pundits were pounding the table about how cheap the banks were at 7x earnings like Washington Mutual, Bear Stearns, Merrill Lynch. Yes they are better capitalized this time around but the tidal wave is much larger this time as well.

 

Warren is selling 7x PE banks if anyone wants to take the other side on this "value investment" 

https://www.sec.gov/Archives/edgar/data/36104/000120919120028815/xslF345X03/doc4.xml

[rb]

The banks feel like a value trap to me. Kind of reminds me of 2007 when the CNBC pundits were pounding the table about how cheap the banks were at 7x earnings like Washington Mutual, Bear Stearns, Merrill Lynch. Yes they are better capitalized this time around but the tidal wave is much larger this time as well.

 

Warren is selling 7x PE banks if anyone wants to take the other side on this "value investment" 

https://www.sec.gov/Archives/edgar/data/36104/000120919120028815/xslF345X03/doc4.xml

That is on form 4. So it actually does look like they are selling to go below 10%.

[widenthemoat]

The banks feel like a value trap to me. Kind of reminds me of 2007 when the CNBC pundits were pounding the table about how cheap the banks were at 7x earnings like Washington Mutual, Bear Stearns, Merrill Lynch. Yes they are better capitalized this time around but the tidal wave is much larger this time as well.

 

Warren is selling 7x PE banks if anyone wants to take the other side on this "value investment" 

https://www.sec.gov/Archives/edgar/data/36104/000120919120028815/xslF345X03/doc4.xml

 

I think Buffett was pretty clear about where he stood on banks during the annual meeting. Please see below, and feel free to jump ahead to 4:35 if you don't feel like watching the whole thing.

 

https://finance.yahoo.com/video/warren-buffett-americas-banks-good-010833729.html

[bci23]

The banks feel like a value trap to me. Kind of reminds me of 2007 when the CNBC pundits were pounding the table about how cheap the banks were at 7x earnings like Washington Mutual, Bear Stearns, Merrill Lynch. Yes they are better capitalized this time around but the tidal wave is much larger this time as well.

 

Warren is selling 7x PE banks if anyone wants to take the other side on this "value investment" 

https://www.sec.gov/Archives/edgar/data/36104/000120919120028815/xslF345X03/doc4.xml

 

I think Buffett was pretty clear about where he stood on banks during the annual meeting. Please see below, and feel free to jump ahead to 4:35 if you don't feel like watching the whole thing.

 

https://finance.yahoo.com/video/warren-buffett-americas-banks-good-010833729.html

 

In that link he said "all banks will have problems" but they are well capitalized for it. He cited energy loans and consumer loans specifically. Maybe its something he doesn't like specific to USB or maybe the facts have changed for him since the annual meeting? He doesn't seem like the type to be trimming below 10% for no reason.

[meiroy]

https://twitter.com/realDonaldTrump/status/1260574760930545666

 

"When the so-called “rich guys” speak negatively about the market, you must always remember that some are betting big against it, and make a lot of money if it goes down. Then they go positive, get big publicity, and make it going up. They get you both ways. Barely legal?"

bet.

 

Barely legal.

 

 

I have this feeling about this -- which could very well be wishful thinking -- that all these guys came out of the woods now to say what they had to say because they saw the market going up, the GOP blocking further rescue packages, and they think more should be done.  They're playing hardball. Of course, the Fed also had a very pessimistic outlook. So, the underlying view is probably authentic, it's going to be bad. Still, one can only hope this is the reason and that it will bear fruit, that we'll be seeing some action soon enough.  Worth buying some short/medium term calls.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

[widenthemoat]

The banks feel like a value trap to me. Kind of reminds me of 2007 when the CNBC pundits were pounding the table about how cheap the banks were at 7x earnings like Washington Mutual, Bear Stearns, Merrill Lynch. Yes they are better capitalized this time around but the tidal wave is much larger this time as well.

 

Warren is selling 7x PE banks if anyone wants to take the other side on this "value investment" 

https://www.sec.gov/Archives/edgar/data/36104/000120919120028815/xslF345X03/doc4.xml

 

I think Buffett was pretty clear about where he stood on banks during the annual meeting. Please see below, and feel free to jump ahead to 4:35 if you don't feel like watching the whole thing.

 

https://finance.yahoo.com/video/warren-buffett-americas-banks-good-010833729.html

 

In that link he said "all banks will have problems" but they are well capitalized for it. He cited energy loans and consumer loans specifically. Maybe its something he doesn't like specific to USB or maybe the facts have changed for him since the annual meeting? He doesn't seem like the type to be trimming below 10% for no reason.

 

Agreed, he also said they don't trim positions at the meeting as you've alluded to, so you may very well be correct. Will be interesting to see how everything plays out. Like Charlie said, nobody really knows at the end of the day. Personally, I would think that as long as the bank you're buying doesn't have a permanent reduction in normalized earnings, you should do fine in the long run at these prices. Even if that means taking some bumps and bruises in earnings over the next year or two. Only time will tell...

[bci23]

https://twitter.com/realDonaldTrump/status/1260574760930545666

 

"When the so-called “rich guys” speak negatively about the market, you must always remember that some are betting big against it, and make a lot of money if it goes down. Then they go positive, get big publicity, and make it going up. They get you both ways. Barely legal?"

bet.

 

Barely legal.

 

 

I have this feeling about this -- which could very well be wishful thinking -- that all these guys came out of the woods now to say what they had to say because they saw the market going up, the GOP blocking further rescue packages, and they think more should be done.  They're playing hardball. Of course, the Fed also had a very pessimistic outlook. So, the underlying view is probably authentic, it's going to be bad. Still, one can only hope this is the reason and that it will bear fruit, that we'll be seeing some action soon enough.  Worth buying some short/medium term calls.

 

Buffett is always looking for a reason to be optimistic so when he is buying essentially nothing, selling air lines and now one of his core bank holdings USB, and starts the AGM off talking about the Great Depression, i don't know what other indicators you need to tell you how bad he thinks this is going to be, and hes the optimist in the group! In 2008 stocks crashed 40-60% but actual GDP only declined mid single digits and unemployment was high single digits, Buffett bought like crazy. This time GDP is declining way more, unemployment is over 20% and will probably take years to get back to even 10%, and stocks are down 15%-20% off highs. It shouldn't be surprising at all that Buffett isn't buying or that the other big fund managers who have been around the block are bearish.

[JRM]

https://twitter.com/realDonaldTrump/status/1260574760930545666

 

"When the so-called “rich guys” speak negatively about the market, you must always remember that some are betting big against it, and make a lot of money if it goes down. Then they go positive, get big publicity, and make it going up. They get you both ways. Barely legal?"

bet.

 

Barely legal.

 

 

I have this feeling about this -- which could very well be wishful thinking -- that all these guys came out of the woods now to say what they had to say because they saw the market going up, the GOP blocking further rescue packages, and they think more should be done.  They're playing hardball. Of course, the Fed also had a very pessimistic outlook. So, the underlying view is probably authentic, it's going to be bad. Still, one can only hope this is the reason and that it will bear fruit, that we'll be seeing some action soon enough.  Worth buying some short/medium term calls.

 

Buffett is always looking for a reason to be optimistic so when he is buying essentially nothing, selling air lines and now one of his core bank holdings USB, and starts the AGM off talking about the Great Depression, i don't know what other indicators you need to tell you how bad he thinks this is going to be, and hes the optimist in the group! In 2008 stocks crashed 40-60% but actual GDP only declined mid single digits and unemployment was high single digits, Buffett bought like crazy. This time GDP is declining way more, unemployment is over 20% and will probably take years to get back to even 10%, and stocks are down 15%-20% off highs. It shouldn't be surprising at all that Buffett isn't buying or that the other big fund managers who have been around the block are bearish.

 

Buffett appears to be dumping the banks.

 

[John Hjorth]

Buffett appears to be dumping the banks.

 

JRM,

 

What's your source for this statement?

[Xerxes]

Maybe this reference.

 

He is trimming JPM but adding slighting to PNC

 

https://www.bloomberg.com/news/articles/2020-05-15/buffett-s-berkshire-trims-jpmorgan-goldman-stakes

 

JPM trim might be from one of the Fellows down the hall.

[JRM]

Buffett appears to be dumping the banks.

 

JRM,

 

What's your source for this statement?

 

I'm just looking at the 13f.  Wells Fargo is down to 5% of his equity portfolio.  Goldman is out, and JP Morgan is reduced 3%.  Keeping in mind this was for last quarter.  It seems like he is reducing his exposure.

 

[sleepydragon]

Buffett appears to be dumping the banks.

 

JRM,

 

What's your source for this statement?

 

I'm just looking at the 13f.  Wells Fargo is down to 5% of his equity portfolio.  Goldman is out, and JP Morgan is reduced 3%.  Keeping in mind this was for last quarter.  It seems like he is reducing his exposure.

 

He didn’t touch any BAC though

 

[meiroy]

https://twitter.com/realDonaldTrump/status/1260574760930545666

 

"When the so-called “rich guys” speak negatively about the market, you must always remember that some are betting big against it, and make a lot of money if it goes down. Then they go positive, get big publicity, and make it going up. They get you both ways. Barely legal?"

bet.

 

Barely legal.

 

 

I have this feeling about this -- which could very well be wishful thinking -- that all these guys came out of the woods now to say what they had to say because they saw the market going up, the GOP blocking further rescue packages, and they think more should be done.  They're playing hardball. Of course, the Fed also had a very pessimistic outlook. So, the underlying view is probably authentic, it's going to be bad. Still, one can only hope this is the reason and that it will bear fruit, that we'll be seeing some action soon enough.  Worth buying some short/medium term calls.

 

Buffett is always looking for a reason to be optimistic so when he is buying essentially nothing, selling air lines and now one of his core bank holdings USB, and starts the AGM off talking about the Great Depression, i don't know what other indicators you need to tell you how bad he thinks this is going to be, and hes the optimist in the group! In 2008 stocks crashed 40-60% but actual GDP only declined mid single digits and unemployment was high single digits, Buffett bought like crazy. This time GDP is declining way more, unemployment is over 20% and will probably take years to get back to even 10%, and stocks are down 15%-20% off highs. It shouldn't be surprising at all that Buffett isn't buying or that the other big fund managers who have been around the block are bearish.

 

I think you misunderstood what I wrote.  Things are bad, very bad.  The stock market movements depend on the Fed.  Druckenmiller thinks the Fed will not inject more trillions in liquidity and so the market will end  its run.  I'm saying the optimistic view here is that the Fed will.