The ongoing banking “crisis” certainly has me concerned. I have been thinking about all of the financial companies I own and trying to determine how much risk there is. I own a very wide portfolio of stocks. Included in the list (upwards of 90 stocks), I own some Bank of America (huge bank), Huntington Bank (Regional Bank) and multiple mutual conversion banks (very small banks).
I also own a few companies that seem to be getting hit hard even if they don’t seem to be directly related to the issues at hand. Stocks like PRAA, a debt collector, and Charles Schwab, a brokerage firm. Both seem to be sliding with the banks stocks.
I would love to hear thoughts on the topic in general, but since this board is at least partially focused on Mutual conversion companies, any thoughts on those specifically would be desired.
My thought is that although the interest rate increases probably hurt these small banks, the fact that most of them are way over capitalized makes me think that they should do well in the long term. They won’t need to panic sell assets at a loss and will eventually do okay as interest rates stabilize (hopefully!). What is everyone else’s opinion? Jim? Thoughts?
I also feel that the financial companies that are not directly related to the interest rate rise should do well as the panic subsides and the markets realize that they aren’t directly affected? Again, any thoughts?
Certainly interesting and concerning times although I will say that I have seen many, many concerning times in the past and panic has never been a good response.
Long all stocks mentioned and many others affected but not mentioned specifically.
I agree with all that. One thing that has interested me though is the thought of banks loading up in long bonds. Other than SVB and perhaps some other fast growing banks that couldn’t put their money to work, it seems to me that most banks lend their money to people or businesses for mortgages, not buy treasuries that never pay very high rates. But maybe I am wrong on this point.
So I think I hear you saying most are going to be okay, but some are at risk. It would be interesting to determine which are which.
In general, it seems to me that the very big banks will be safe for a number of reasons, just one of which is they will be incentivized to buy the ones in trouble for a song, re: JPMorgan. Btw, I think that is not good, to allow them to get bigger and profit from the situation.
I think the regionals and smaller may be at risk but they have been taken out to the woodshed and shot on the market so it may be too late in my opinion unless you own one of the few that may not make it.
And then the mutual conversions I already mentioned. They are mostly over reserved so I tend to think that is just the market avoiding unknown risk.
So with your general description of the banking sector which I agree with, are you avoiding, holding steady, or adding in the downturn?
If you listen to the talking heads on CNBC, many think that 4.5% from T-bills with minimal risk is very attractive compared to what else is out there. And of course mortgage lending is relatively long term investing. 15 to 30 years. Risky when rates are rising.
I agree we are not talking about big banks. They are more heavily regulated and have passed stress tests. You also expect them to be more diversified.
But its the smaller banks that were exempted from stress tests that you worry about. Well managed ones should be ok. But those that took risks with long term bonds that then lost value as interest rates rose can be problematic.
I have added to FFBW recently and have turned my attention to FFNW. No balance sheet was provided in their recent earnings release, but price to book was around 0.6 at year end. Their equity to assets was 11%, lots lower than FFBW and share count has not been reduced over the past year. It’s yield is now over 5%, so it seems it gives back to stockholders through the dividend vs. share buybacks. Any thoughts?
PS Also have HBAN on my watch list - that’s a local bank for us in the Buckeye state.
Here’s a 3 minute CNBC video excerpt of an interview on Friday of well known value investor, Bill Nygren of Oakmark Mutual Funds, on his thoughts about the disconnect between the stock market and the fundamentals of many of the regional banks, and specifically Truist Bank (TFC), that may be reassuring:
I own NYCB, TFC, TFSL and USB. TFSL is the only one I own that has me a little nervous because of all the residential mortages in their portfolio, although management has not issued any statements that are concerning (yet). The other three are well-capitalized with cash and other short-term securities and have diversified deposits and are not overweight uninsured deposits according to the information they have provided.
I think Mr. Market (and many of the talking heads at CNBC) has overreacted, as it tends to do, about the failures of a few banks over the last month.
You’re correct about the shorts. They are doing their part in furthering share price destruction in the regional banking space. But as a long-term investor I will stay the course until and unless I see cracks in the regional banks that I own. So far, I am not seeing those cracks.
Part of the issue that the market is sweating is not just deposit flight. Many banks have actually increased their deposits over the last quarter, though perhaps they’ve had to pay higher rates to keep them. Of course, others are continuing to deal with deposit flight in more or less significant ways. But investors seem to be quite worried about the asset side of the equation, in particular exposure to commercial real estate. And that’s an area that hits many different banks, even those with minimal effect from deposit flight or even bearable losses on bond portfolios. With low occupancies in office buildings in major cities, CRE values may take a serious hit, and (obviously) given banks’ leveraged exposure, that could really wipe out equity at some players.
The bond market is pricing some serious rate cuts already for later this year, anticipating that the Fed must reverse couse rather abruptly. Will that happen? The Fed’s been behind the curve for the past two years or so. Of course, lower rates would help buoy asset values and therefore the banks.
Residential loans compose only about $90 mn of the $244 mn loan book. About 7% is construction loans.
Is the remaining exposure excessive? That depends on their ability to underwrite loans profitably through a cycle and the exact sector exposure, since CRE is a broad category. But the figures here are not in and of themselves excessive.