There are few regional banks that are now selling at .5 x BV; I will give an example, WAL, has a last know Tangential book value of $54 and expected to earn $10 EPS and at one point traded for as low as $7.
If you are brave, and want to swing, don’t risk more than 1 or 2 % of your capital and look at some of the deeply sold names and see whether the reasons are adding up.
For now, I have added to WFC, C, BAC and sold a bunch of put options (expecting the volatility to go down and close the puts).
A quick look at the balance sheet shows that more than half of WALs assets are comprised of mortgages. So the big question is - are they fixed rate mortgages or adjustable ones? If fixed rate, their current value is likely to be somewhat impaired (I say “somewhat” because many of them appear to be relatively recent). If they are adjustable ones, then less so.
Also, look at $20 of their deposits are non-interest bearing deposits, these are the money sitting in Checking account or savings account, As long as their is no bank run, these banks can take any hit to their NII and will come out other side strong.
The key point I was making is, if you could buy a deep discount to BV then you are good.
My own story I had sold only one put option for FRC, because it is a quality bank. Then a rumor started circulating BAC is going to acquire that bank in the morning and not sure at what price it will happen, so close that put and accepted loss. That’s the real risk, if the bank faces bank run or has to be sold, then your equity is at risk. I wanted to buy FRC bonds, I couldn’t. E*Trade is refusing to sell it to me. They want to protect me from myself. My expectation is, even in a sale, the equity could be wiped not the bondholders and bonds are quoting 60c on the dollar. I don’t even need the interest rate, when it matures just redeem the bond on face value, I will make tons of money.
But the real key is you need to know these names and cannot on the fly into these names. That’s the risk. But start looking into some names, based on filter and I am sure we will get to buy them at good price not like a steal.
And my point, that I forgot to mention, is that we don’t know current BV until we know the value of their assets. Then, of course, we must project future BV based on interest rates that are 0.5% higher than today.
It changes but not that much. Also, you know the last book value and then you have the weighted interest rates and how much securities they have. SO you can easily calculate how much the book has deteriorated. I would be very surprised book value going down by 50%. Also, they don’t have to necessarily sell their long book, or even mark it down. The reason I am saying this is, remember the non-interest bearing deposits cost is so low, which is the source for their long book, so they are not going to be losing money. The mark to market is something that will revert as the interest rate comes down. Of course you have to plan for “higher for longer” scenario, and deposit leaving the institution etc.
Oh, I don’t think it is possible for it to go down 50%. But it could go down 10 or 15%. And then there’s the other issue … what if some (or many) depositors decide to pull out of the 0 to 3% accounts and buy T-bills at 5% instead?
That’s ok. Treasuries are not unlimited supply, if everyone decides to do that, then the rates will go down
Also, in the case of WAL you are still forgetting $20 B is non-interest earning deposits, they are sticky, they are not leaving to treasuries. What goes to treasuries is mostly CD’s.
If you look at their Q1 Investor presentation (2/14, of course world has changed since then )
ROTCE 27%, NII 3.98%; and near $10 EPS; unbelievable numbers;
Look at slide 14 for details on the deposits;
They have issued an 8-K on Monday stating they have $25 B liquidity and seeing modest deposit outflow. The world has changed from worrying about credit to deposits.
As the dust settles, I am expecting regional banks are going to merge, and going to get bigger, stronger. We have no idea of knowing who is going to be bought.
For now, I have sold couple of $15 puts for April strike. It is a risk, I don’t need to take, yet…
There are many banks like (only example) ZION has issued sub-ordinated debt, which are listed and traded in the market. Now many has recovered but not yet to the level before SVB failure. So, they are all yielding anywhere between 5.5% to 9% depending on the duration and credit risk.
Note, these are bonds and not equity or preferred. Generally bond holders are made whole, but in the case of SVB they are not. You are taking a risk, and understand if you want to buy them. Just throwing out an idea.
WAL latest price is $59.99. On hindsight it was stupid, of me to sell puts, instead of buying calls or just buy some lottery ticket positions.
Those who bought it made a ton. The price dropped to $7.5, one hedge fund guy bought a ton as the price dropped, pretty much back stopped the stock at this level. If he held on to his shares, he made ton of money.
