US Banks

[alertmeipp]

Many US banks have risen a lot this year but still many of them are trading at ~10x 2014 earning - it's not hard to make a case that earning will be growing IF the econ is growing again... are you guys trimming bank holdings or just hold or adding?

[DTEJD1997]

Paying a P/E of 10 for a US bank would take my breath away!  That is quite a rich valuation!

 

I WISH I could get a valuation of 10 on some of my banks.  Then I would be tempted to sell!

 

For example, please take a gander at State Bank Financial Group (SBFG).  This used to be the bank called "Rurban Financial".  They are based in NW Ohio, and have operations throughout most of Ohio and parts of Indiana. 

 

They got hit in the financial meltdown and traded all the way down to $2/share.  They have made something of a comeback.  Book value has solidified and has gone up.  The quality of their loan book (after taking some writedowns & charges) has been slowly & steadily improving these last 8 quarters or so.  Regulatory capital levels have improved every quarter for at least 9 quarters.

 

They re-initiated a dividend a few quarters ago, and have raised it.  I strongly suspect it will be raised again in the next few quarters as it is so very low (.12/share).

 

There are several other interesting facets of this company.  The P/E is 7, as they are earning $1.12/share.  HOWEVER, those earnings are a bit LOW.  SBFG is taking a small charge every quarter and amortizing goodwill from some very small banks that they took over years ago.  So true CASH earnings are probably in the neighborhood of $1.24/share.  The rate of earnings growth will probably start to slow down, but they will still be GROWING.

 

Another interesting facet of SBFG is the insider buying.  I've never seen anything like it.  The insiders were buy from about $3/share, all the way up to $9/share.  Small, slow, steady purchases of 200, 300, 400 shares.  Time & time again, for years.  NO SALES, only purchases.

 

Of course, SBFG is also trading for a discount to book value (11.20/share), which seems a bit silly.  They are earning just over 10% ROE.  i would argue a company that is earning over 10% ROE, and likely to do so in the future, should be trading for AT LEAST it's book value.

 

This is not the only bank like this...bargains abound in the smaller community banks!

[alertmeipp]

Interesting, what are these smaller banks earning power pre-crisis? How would rising rate impact them?

[kevin4u2]

Many US banks have risen a lot this year but still many of them are trading at ~10x 2014 earning - it's not hard to make a case that earning will be growing IF the econ is growing again... are you guys trimming bank holdings or just hold or adding?

 

Banks are still cheaper than the banks in Canada and Australia. I would be worried about the loan books of those banks than the US banks. US banks are still under earning their potential. I own WFC BAC and JPM. All excellent banks and the profit tap is just beginning to open up again.

 

When I purchased my WFC I knew they could earn $4 per share and dividend over $2 per share. The dividend yield will be 8-9% (on purchase price) and I plan on using that steady stream of income to pay the bills for decades to come. The best is yet to come. That was a punch card opportunity and it will be the gift that keeps giving. It was what I like to call value in plain sight.

 

The question is whether or not the banks are still cheap? I'm holding because I have made my bets. The dollar bills have been picked up but I believe there are still 50 cent pieces laying around.

[kevin4u2]

Interesting, what are these smaller banks earning power pre-crisis? How would rising rate impact them?

 

Rising rates means higher profits. Banks make money of the yield curve. 

 

I find it amazing how the news spins the interest rate question. Supposedly it was bad for the banks to have falling interest rates and now with rising interest rates it is still bad. You can't have it both ways. Overall it will be a net positive as rates normalize.

[DTEJD1997]

Interesting, what are these smaller banks earning power pre-crisis? How would rising rate impact them?

 

Well, that is the $64 Billion dollar question!

 

It depends on how rising rates affect the economy as a whole, AND how a particular bank's loan book is structured.

 

For example, there are some banks that I own(ed) that loan primarily to businesses.  These loans are much shorter duration than mortgages.  A lot of business loans also have adjustable rates.  So these types of loans would be better to hold in a rising rate environment. 

 

Consumer loans would also be good as they can re-rate every year.  They are also high interest enough that a rise of 50 or 150 basis points is not going to affect it too much.

 

Where you get killed is having 30 mortgages that are fixed rate.  Their duration is simply too long. Rising interest rates will impact those severely.

 

The bank makes their money on the spread that they earn between what they have to pay for deposits and what they loan the money out at.  Right now, most bank's spreads are something around 4% or so.  Extremely well run banks will have higher spreads....lesser quality banks will have lower spreads.

 

The other problem with rising interest rates is the negative correlation between asset prices and interest rates.  With higher interest rates, people are less inclined to hold stocks, and will switch to bonds.  In order to counter this, the P/E of a stock will have to come down....

 

The EASY money has already been made in this sector.  Prices are up 3x, 4x, 5x from the lows...but it is still relatively undervalued. 

 

No dollar bills to be made here, but there are still half-dollars and quarters to be picked up!

 

[Guest wellmont]

most of the small us banks don't even earn 10% on equity. and most don't want to sell because it means job losses for the selling bank. so it's a tough situation. as you don't want to really own these unless they sell out. there are a few that earn 10% - 13% on book and those trade near book value, and imo are worth holding whether they sell or not.

[bookie71]

And then there are the locals that make money, have very conservative balance sheets and pay nice dividends. FBAk (First National Bank of Alaska) is one. Dividend is almost 3%, didn't loose money when Alaska lost roughly 25% of its population in the 1980's AND has a very conservative balance sheet and large reserves. It also is owned to a large % by the Cuddy family and is buying back it's stock.

Another local, but am unsure how adequate their reserves are is Northrim.  It has done quite well. 

[Guest wellmont]

yeah that's a good example of what I'm talking about. it sells for between 1 and 2 times book, yet it doesn't even make 10% on it's equity. yield is 2.8%. there are some banks that have higher roe and higher div yield selling for a around book. hard to find though and harder to buy.