OT-Nygren on Banks

Bill Nygren comments from his recent Oakmark commentary:

“We believe that investors are simply looking at how much bank stocks declined in the past two recessions and anticipating a repeat performance. But we believe several facts make that unlikely. First, banks are much better capitalized today. As an example, Bank of America projects a higher tangible equity ratio at the bottom of the Fed’s severely adverse scenario than it had at the top that preceded the Great Recession. Second, banks have historically lowered lending standards before a recession to maintain revenue growth, but every bank we own today is committed to maintaining lending standards and measuring growth on a per-share basis, which gives credit for capital used to reduce shares outstanding. Third, banks today benefit from economies of scale much more so than in the past: Costs for regulatory compliance, fraud protection and digital banking, for example, do not grow linearly with size. That means that being big is a competitive advantage, which results in market share gains as measured by primary checking account relationships. Finally, valuations are extremely depressed: The S&P 500 sells for about 15 times expected 2023 profits, compared to the banks we own that range from 4 to 8 times expected earnings. Our short-term focus is always on business performance, which has been good, rather than stock performance, because in the long run, they converge.“

FYI- Nygren, like BRK now, also owns ALLY (digital financial services) which catches my eye here despite the recession risks: $11.0B Market cap, $9B Revenue, PE-4.2, PEG-0.27, 3.43% dividend, payout 15.5%, 44% op. margin, 19.5% ROE, AND $2B approved for share buybacks during 2022.


I like BAC, Citi and there are some Regionals like PNC are looking priced expecting pretty bad outcome. Currently most banks earnings are depressed because of their reserves, not credit or loan loss reserves, but their bond assets are marked to market reserve, and their compliance cost is slightly higher than past cycle, last but not least, the M&A, IPO, are down, i.e., their investment banking activities are not earning below normal level. Now, this will continue for the last quarter (2Q the results will come later) and the current quarter (3 Q). From 4Q onwards, higher NII (net interest income) will kick in along with declining reserve requirement. Currently most banks have scaled back their buyback’s. So you have all factors are aligned to depress the stock price.

It is time to buy, at least nibble.

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