Are big banks value traps ?

[elliott]

I'm playing devils advocate here but I think you guys underestimate the banking business, particularly in today's world.

 

Calling the banks stodgy or tech-averse is superficial IMHO. Banks are not tech averse, they are incredibly financially disciplined (it's their raison d'etre!). These are not VC shops looking to cash in by inventing the next best tech.

 

Additionally you are ignoring the regulatory component. The FRB will be so far up a new bank's colon that it's too painful to think of. The large banks took 10 years to comply with FRB/OCC matters. And they are still not done.

 

Citi, Wells, JPM all have over 200,000 employees, each. Google and apple have half that. Simply to bring on the kind of manpower needed will be a billion dollar endeavor.

 

It is not just 'lets build some credit models and start slingin' cards". On the models side, these banks have 2, 3, 4 thousand models each. Who is going to build these? Who is going to validate them? How long is that going to take? It is not feasible. And the people building these models - they are not cheap. We billed out at 600, 700 an hour for regulatory models, not even valuation models which are much more important. And then you need a validation group which again, is incredibly not cheap.

 

Then you need to integrate into the markets. On the consumer side, now you need instantaneous scoring services at a massive scale and you need retail partners to integrate it. Retail partners who are already being serviced by these large banks and at a lower cost than you can provide. And these banks and policy teams who know these business better than you (and they) do. This is not just incredibly expensive but a hell of an endeavor to start from scratch. Systems migrations take two years - and that's a migration.

 

On the institutional side, it's even more opaque. First you have no idea what these product which are being traded. Show me anyone at Apple or Google who can explain why Kirk's spread option model is conceptually unsound but under what circumstances it is still acceptable to use. Nobody. Now tell me who is going to figure that out and then design a systems application to price certain products with certain models under specific circumstances. Of course you can use vendors to tap into the market in this way but the regulators will destroy you. And they're expensive as hell and there's a reason all the banks have migrated to in-house solutions. So unless you want to lose money on every trade for 4-5 years until you can build your own system to migrate over from a vendor platform, you're out of luck.

 

This article: https://seekingalpha.com/article/2561895-apple-pay-has-long-term-implications-for-visa-mastercard-and-retail-banks

postulates that Apple is entering the retail payments sphere as a means to enter the financial industry at a whole.

Well look at the payments - has Apple or Stripe built their own systems? No, they are playing on top of the established rails. Maybe this will change but it is difficult to see why. To build out such a system is incredibly expensive and the payoff is very uncertain. Expected ROI today is almost certainly very negative. And V/MC and the banks are expected to sit tight while this happens? I think not. Even if Apple or Google does go down this road they are opening themselves up to so many costs it will be absolutely brutal and the banks will slaughter them on the institutional side.

 

Anyways take it with a grain of salt because predicting the future is a foggy endeavor but if I had to wager I would say the odds are with the status quo.

 

I agree with you 100% that many forecasting the end of banks are not factoring in appropiately the complexity of regulations and the lending business.

But, will disruptors have to bear such complexities? Some say the real disruption is coming from the non banks.

 

In any case, I can imagine google, facebook, or amazon offering checking accounts to make money not from lending but simply from the users data. Actually, I thought that was precisely the reason behind their interest in banking. Granted, if they dont lend the money, how will they pay interest? Maybe they wont. There is a lot of money out there sitting in bank accounts earning 0% pa thanks to central banks. Alternatively, they could also assume the UI/client facing side of the deposit business by aggregating deposits from several banks. Banks would still exist in this scenario, but in this area at least they would have been commoditized.

How would that impact their profitability? I have no clue.

 

 

[elliott]

Google made a move.

 

https://www.cbsnews.com/news/google-checking-accounts-will-come-with-citibank-fees/

[Spekulatius]

Google made a move.

 

https://www.cbsnews.com/news/google-checking-accounts-will-come-with-citibank-fees/

 

More clarity from one of the horses mouth:

https://www.sfcu.org/stanford-federal-credit-union-announces-partnership-google/

 

It looks like a standard CU account with a GUI/ mobile wrapper from Google. It is interesting they they chose to partner with a CU. I wonder how they deal with the affiliation restriction for a CU. You have to be local or work for one of the many Company’s on that affiliate list or use a “backdoor” in order to join a CU.

[RuleNumberOne]

I think the regulators won't allow "fintechs" to enter banking. Probably Buffett talks to bank CEOs and regulators about this all the time.

 

Given enough time, the banks will update their tech infrastructure and catch up. I think this is what is happening.

 

My fear with banks is what happens in the next recession. Are insolvent European banks their counterparties? Can Europe prevent deleveraging or the failure of the Euro?

[wabuffo]

I think the regulators won't allow "fintechs" to enter banking

 

Wal-Mart tried to enter banking and was rejected by the Chair Bair.  Remember when everyone feared the growth of Wal-Mart and its ambitions?

 

https://www.nytimes.com/2007/03/17/business/17bank.html

 

Today - just substitute Amazon (or Facebook, Google, etc) for Wal-Mart.

 

wabuffo

[elliott]

times change, wabuffo, and what was once unthinkable can become acceptable. but interesting piece of news in any case.

[stahleyp]

times change, wabuffo, and what was once unthinkable can become acceptable. but interesting piece of news in any case.

 

I agree but there is a lot more political pressure on those guys now than walmart in 2007.

[rogermunibond]

Ant Financial and WeChat Pay entered banking in China and account growth for the large big 4 banks has pretty much stalled.

[Spekulatius]

Banks stocks are performing terrible. The 0.5% rate cut (with probably more to come) will reduce operating earnings for years to come. Add some loan losses to this, which have been largely absent and you have to reset expectations for earnings and ROA permanently lower. Sounds like perfect a value trap to me. I guess we will find out.

[Viking]

Banks stocks are performing terrible. The 0.5% rate cut (with probably more to come) will reduce operating earnings for years to come. Add some loan losses to this, which have been largely absent and you have to reset expectations for earnings and ROA permanently lower. Sounds like perfect a value trap to me. I guess we will find out.

 

Agreed. The crazy thing is in 3 months the story could once again get flipped on its head. Not saying its likely but things are moving very fast right now; hard to know where we will be when the dust starts to settle.

[Spekulatius]

Banks stocks are performing terrible. The 0.5% rate cut (with probably more to come) will reduce operating earnings for years to come. Add some loan losses to this, which have been largely absent and you have to reset expectations for earnings and ROA permanently lower. Sounds like perfect a value trap to me. I guess we will find out.

 

Agreed. The crazy thing is in 3 months the story could once again get flipped on its head. Not saying its likely but things are moving very fast right now; hard to know where we will be when the dust starts to settle.

 

I do not think that interest rates are likely to rise in the mid term (2 years). There is just no way we are seeing an increase before the election. I think we are going to see another 0.25% cut within a short time.

[Viking]

Another risk for the big banks is if the Democrats take the Presidency and roll back the corporate tax cuts.

 

Negative interest rates + recession + corporate tax rollback = lower stock price

 

The odds of this trifecta actually happening are going up (from where they were a month ago).

[mcliu]

I think the competitive positions of the big US banks vs small & foreign banks have improved the last 10 years. In 5 to 10 years, this might work out quite well.

[Spekulatius]

Buying bank stocks during the decline:

[Jurgis]

Buying bank stocks during the decline:

 

Fake!

 

IRL he was yelling "HODL!"

[DooDiligence]

There's no value without fear.

 

I got shaken out of Davita & Express Scripts before they got run up.

 

Screw it, I'm hodling.

[Cigarbutt]

There's no value without fear.

 

I got shaken out of Davita & Express Scripts before they got run up.

 

Screw it, I'm hodling.

Apologies for often spreading (spouting nonsense type) questionable value information.

The idea is to help shape the risk-reward curves (on an individual basis), given wide-ranging perspectives.

 

Take WFC for instance, keeping in mind what John recently described in terms of the five pillars of earnings strength, mixing the latest Crédit Suisse memo with the end of year results.

https://www08.wellsfargomedia.com/assets/pdf/about/investor-relations/presentations/2020/credit-suisse-conference.pdf

There is a lot to like with WFC and I would bet that it will do better than the markets over a thirty-year period.

However, one of the potential scenarios implies a negative rate environment (thought to be essentially impossible just a few days ago) and an associated deleveraging environment (thought to be impossible now).

FWIW and to help judge the relevance of this post, I've found the markets to be extremely boring in the last few years and that includes the state of mind at the time of this writing.

I also take my Martini shaken, not stirred. :)

[sleepydragon]

I think the Fed made a big mistake cutting rate.

Look at the bank stocks. They need to health banks at time like this. Instead they are trying to pop up PE firms.

Now banks are toasted. Soon they have to call Buffett to bail out.

 

 

 

[meiroy]

I'm not so sure they are value traps, if you buy them cheap enough, though I do agree there will be farther rate cuts.

 

1.  They have MASSIVE political power.

2.  There's a coming housing tailwind with demand far greater than supply.

3.  ^This with lower rates might impact NIM but revenue would increase (assuming there is a sufficient amount of not-dead people to purchase houses).

4.  Quite a while ago, banks like JPM and GS have started to move away from NIM. It doesn't mean they will succeed.

5.  Worried about Dimon. 

6.  Banks stocks being bashed is a sort of protection against the Dems taking office though it's highly doubtful Biden would be hostile and Warren is out, not to mention Sanders is highly unlikely.

 

 

 

 

 

[LC]

I also take my Martini shaken, not stirred. :)

How cavalier!

[stahleyp]

Buffett seems to think interest rates will stay low. What is he seeing that others aren't?

[DooDiligence]

There's no value without fear.

 

I got shaken out of Davita & Express Scripts before they got run up.

 

Screw it, I'm hodling.

Apologies for often spreading (spouting nonsense type) questionable value information.

The idea is to help shape the risk-reward curves (on an individual basis), given wide-ranging perspectives.

 

Take WFC for instance, keeping in mind what John recently described in terms of the five pillars of earnings strength, mixing the latest Crédit Suisse memo with the end of year results.

https://www08.wellsfargomedia.com/assets/pdf/about/investor-relations/presentations/2020/credit-suisse-conference.pdf

There is a lot to like with WFC and I would bet that it will do better than the markets over a thirty-year period.

However, one of the potential scenarios implies a negative rate environment (thought to be essentially impossible just a few days ago) and an associated deleveraging environment (thought to be impossible now).

FWIW and to help judge the relevance of this post, I've found the markets to be extremely boring in the last few years and that includes the state of mind at the time of this writing.

I also take my Martini shaken, not stirred. :)

 

You have absolutely nothing to apologize for.

 

I welcome positive & negative viewpoints, especially from people like yourself who are much more intelligent & informed than I am.

 

This downturn is a gut test for me & I've got my big boy pants on.

 

---

 

BTW, I officially claim credit for calling the market top.

 

I'm all in on VLGEA.

 

No more extra FOMO cash.

Severe downturn 100% assured.

 

Waiting for CNBC to call for an interview  :)

 

---

 

I'm not selling anything, thanks to the fact that I'm adhering to a basic tenet that requires me to maintain 18 months worth of expenses in cash.

 

In another 14 months I'll have finished the associates degree & If the markets are still in turmoil, I may go back to work offshore so that I won't have to sell anything that I don't want to.

 

My investment horizon is long & I take full responsibility for any realized or paper losses.

I give all the credit for any gains to luck.

[Spekulatius]

Well, my call was apparently correct, even though possibly for the wrong reasons. Saved me a few buckshot losses for sure.

 

If we indeed follow the European playbook, we will see the banking industry grinding along with low ROE and real estate (especially residential) shooting up, just like what happened in Germany and to some extend France. If I were Millennial, I would really Start taking notice and get on the bandwagon, and take advantage of thr low interest rates and refinance the hell out it as. I bet we are seeing rates in the low 2% later this year, that ought to make owning RE competitive in all but the most pricy areas.

 

If I were the Fed, I would announce a floor for interest rates to save the banking system. I don’t know what the number would be, but it should be positive, They should just state that they never cut the rate below 0.5% or something like that and keep it positive. I don’t really think that cutting further is doing anything and I think the cut below 2% is already not really helping anything other than getting asset inflation in areas where you probably don’t want them.

 

At some point, the banks are becoming bargains. I am not sure we are there yet. Perhaps WFC at or below tangible book value is that point. Smaller banks will hurt a lot and will be forced to merge. lots of jobs will be lost as a consequence of that and most likely, salaries in this sector will be permanently lower too over time, making it much less attractive for employees (the same happened in Europe by the way). Investment banks ironically and credit card companies probably do better and may even benefit from lower interest rates. In my opinion, GS right now is more interested than WFC and trades already at a discount to tangible book.

[bennycx]

Buffett seems to think interest rates will stay low. What is he seeing that others aren't?

 

Where did you get that? My impression is that he thinks it will rise eventually

[stahleyp]

Buffett seems to think interest rates will stay low. What is he seeing that others aren't?

 

Where did you get that? My impression is that he thinks it will rise eventually

 

He's said it lots of times during interviews. Kept talking about how the stock market is cheap if interest rates stay low. I don't think he would say that if he though interest rates were going to go up over the intermediate/long term.

 

He even said this in the recent letter:

 

"Forecasting interest rates has never been our game, and Charlie and I have no idea what rates will average over the next year, or ten or thirty years. Our perhaps jaundiced view is that the pundits who opine on these subject reveal, by that very behavior, far more about themselves than they reveal about the future.

 

What we can say is that if something close to current rates should prevail over the coming decades and if corporate tax rates also remain near the low level businesses now enjoy, it is almost certain that equities will over time

perform far better than long-term, fixed-rate debt instruments."

 

If something close to current rates should prevail. That's the key which makes me think that he thinks those are the odds.