ILLUSTRATION BY LYNNE CARTY / BARRON’S; DREAMSTIME (2) Cover Banks Banks Survived Another Week—and the Biggest Ones Look Like Winners The nation's banking giants will be beneficiaries of the industry's turmoil. They have cheap stocks, and hefty dividend yields. By Andrew Bary March 17, 2023 8:52 pm ET The U.S. banking system looks to have skirted a full-blown crisis in the past two weeks after the worst scare since 2008-09, thanks to regulators’ moves to effectively back deposits and provide loans to the nation’s banks. Questions remain about the health of some regional banks, even after 11 large banks rescued San Francisco–based First Republic Bank (ticker: FRC) on Thursday with a deposit infusion encouraged by the government. But America’s biggest banks, including JPMorgan Chase JPM -3.78% (JPM) and Wells Fargo WFC -3.92% (WFC), look safe and seem like good investment bets, even though tighter regulation, higher capital levels, and greater liquidity requirements are likely to trim industry returns. First Republic shares fell Friday by almost 33%, to $23.03, after the bank suspended its dividend, while selling in a broad group of regional banks sent the Invesco KBW Bank KBWB -5.18% exchange-traded fund (KBWB) to a new low for the year. The ETF fell 15% in the past week, and nearly 30% in the past two weeks, as concerns spread after the failure of SVB Financial’s Silicon Valley Bank and Signature Bank. Advertisement: Scroll to Continue How should investors approach the new environment? Evercore ISI analyst Glenn Schorr thinks new regulatory rules could eventually lower banks’ return on equity by 10% t o 15%, and possible more for smaller banks. The industry has been earning 10% to 15% ROE. Bank stock-buyback activity could be muted this year. DREAMSTIME Some of those negatives, however, are reflected in depressed stock prices and ample dividend yields throughout the industry. The KBW bank ETF is off 35% in the past year, and is trading back at 2016 levels. In the 12 months that followed both the 2008-09 financial crisis and the 2020 bank stock selloff, the KBW bank stock index rose by at least 75%. Investors can debate whether bank stocks have bottomed yet, but shares of the largest U.S. banks already reflect a lot of bad news. Other potential winners, in addition to JPMorgan and Wells Fargo, include Goldman Sachs Group GS -3.67% (GS) and Morgan Stanley MS -3.25% (MS), which are structured as banks but have attractive franchises and do relatively little traditional banking. The six biggest banks, which also include Bank of America (BAC) and Citigroup (C), carry dividend yields of 3% to 4.5%, which are safe. The stocks generally trade for 10 times 2023 earnings, or less. The even-higher dividend yields on regional banks also appear secure. “The value proposition of the biggest banks has been enhanced,” says Schorr. These banks’ attributes include product breadth, technology advantages, capital, size, and importance, all of which likely make them too big to fail. Deposits flowed into the largest banks in the past week, and that trend could continue. “We love our regional banks. But in an environment where safety trumps all, it becomes harder and less profitable to be a smaller institution,” Schorr says. Further industry consolidation seems inevitable. The U.S. still has more than 4,000 banks, while the United Kingdom and Canada each are dominated by just six institutions. Regional banks have been advantaged relative to the largest banks due to their lower capital requirements and lighter regulation. That likely will change. “The markets don’t like uncertainty, and there is a lot of that now,” says Barclays analyst Jason Goldberg. Advertisement: Scroll to Continue Overall, U.S. banks are in good financial condition. They have low levels of problem loans, unlike in 2008-09. Regulators have succeeded in imposing standards that have forestalled loan and mortgage problems. Newsletter Sign-up Market Lab Exclusive data, tables and charts from Barron's Market Lab. SUBSCRIBE What the regulators didn’t anticipate were large losses in the banks’ bond investments. U.S. banks bought trillions of dollars worth of Treasury and agency mortgage securities in the past few years as interest rates fell to historically low levels. Those holdings showed losses of more than $620 billion at year end after a sharp selloff in the bond market last year. Regulators encouraged these investments in their capital rules for the banks, as such holdings carry minimal or no credit risk. But they have considerable interest-rate risk. In fighting the last war, so to speak, regulators didn’t anticipate the impact of higher rates on bond portfolios. To bank critics, the huge bond losses show that the industry can’t seem to avoid big, periodic missteps. And with certain exceptions, bank shares haven’t been a way to beat the stock market. Bank indexes have underperformed the S&P 500 stock index over the past five, 10, and 20 years. Bank investment also can be asymmetric, given the possibility of huge losses or total wipeouts. Banking Math The U.S. banking industry has large unrealized bond losses due to the rise in interest rates. Here's a look at the theoretical impact on capital ratios if these banks were forced to recognize the losses. Bank Capital Ratio* Regulatory Requirement Capital Ratio Adjusted for Bond Losses** LARGEST BANKS Morgan Stanley 15.3% 13.3% 13.4% Goldman Sachs 15.1 13.8 14.9 JPMorgan Chase 13.2 12.5 11.5 Citigroup 13.0 12.0 11.3 Bank of America 11.2 10.4 5.9 Wells Fargo 10.6 9.2 8.0 OTHER BIG BANKS State Street 13.8% 8.0% 8.7% Bank of New York Mellon 11.2 8.5 8.2 PNC Financial Services 9.1 7.4 7.4 U.S. Bancorp 8.4 7.0 5.3 *Common equity Tier 1 ratio **Unrealized bond losses adjusted for taxes Source: Barclays Berkshire Hathaway (BRK.A, BRK.B) CEO Warren Buffett eliminated nearly all of the company’s exposure to the industry in recent years, with the exception of Bank of America. Bad investments in federal agency mortgage securities doomed Silicon Valley Bank, which regulators closed on March 10. Many big banks have large unrealized losses in a key category of their bond investments. Advertisement: Scroll to Continue Bank of America’s are the largest. The bank had a paper loss of $109 billion at year end on a $632 billion portfolio of mostly federal agency mortgage securities with maturities of over 10 years. They are carried using held-to-maturity accounting. The bank intends to hold its hold-to-maturity securities to maturity.. Those bonds carry an average rate of just 2%, way below current market rates on securities of 5%. Given the accounting treatment, the paper losses don’t depress the bank’s capital. But the losses are significant relative to Bank of America’s $175 billion of tangible equity at year-end 2022. JPMorgan was showing an unrealized loss of $36 billion on bond holdings at the end of 2022, compared with Wells Fargo at $41 billion, and Citigroup at $25 billion. The table nearby shows the theoretical impact on a key bank capital ratio—Tier 1 common equity—if bond losses in the held-to-maturity category were reflected in that capital measure. The analysis from Barclays’ Goldberg shows that the impact among the largest banks would be greatest at Bank of America. Worth the Risk Stocks of big banks look like bargains after the recent selloff. Bank / Ticker Recent Price 52-Wk Change Market Value (bil) 2023E EPS 2023E P/E Dividend Yield Price/Tangible Book Bank of America / BAC $28.97 -32.3% $232 $3.40 8.5 3.0% 1.3 Citigroup / C 45.62 -19.7 89 5.82 7.8 4.5 0.6 Goldman Sachs Group / GS 315.09 -7.5 110 34.11 9.2 3.2 1.1 JPMorgan Chase / JPM 130.75 -5.5 385 12.98 10.1 3.1 1.8 Morgan Stanley / MS 87.01 -5.2 146 7.21 12.1 3.6 2.2 Wells Fargo / WFC 39.30 -23.8 148 4.78 8.2 3.1 1.1 E=estimate Sources: Bloomberg; company reports Bank of America’s supporters on Wall Street say the bank’s bond losses are offset by the rising value of its huge, low-cost deposit franchise of $1.9 trillion, including $1.4 trillion of retail deposits. Banks generally don’t put a value on their deposit franchise, but deposits are worth more as rates rise. Having 1% deposits is more valuable in a 4% rate world than in a 1% world. Bank of America isn’t under pressure to sell any of those securities—sales would cause it to realize the losses—given its enormous liquidity. But they will weigh on its returns for years, particularly if the bank is forced to pay more than its current 1% for deposits. “These are money-good securities and there is no reason to sell them,” says Wells Fargo banking analyst Michael Mayo. Advertisement: Scroll to Continue KBW analyst David Konrad wrote on Friday that the Fed “may begin to more closely look at held-to-maturity losses when addressing capital returns for banks.” That might not be good for Bank of America. The bank declined to comment. For investors, it pays to stick with quality, and JPMorgan remains a standout. “JPMorgan is a big beneficiary of the current environment,” Goldberg says. “It’s the gold standard in the industry and has a fortress balance sheet. Customers increasingly will pay for a bank with a fortress balance sheet.” At $126, JPMorgan shares trade for about 10 times 2023 estimated earnings and yield 3%. Goldman Sachs is a top-notch trading and investment banking bank whose strengths have been obscured by the recent travails of its relatively small consumer business. Goldman tried to organize an equity rescue package for SVB before it collapsed. While that effort failed, it cost Goldman nothing, and the firm got the go-ahead to liquidate some $21 billion of bonds in SVB’s portfolio. That likely was a profitable trade. “Buying Goldman Sachs around book value is a good idea,” Schorr says. Advertisement: Scroll to Continue The stock, at $306, trades for a small premium to fourth-quarter book value of $304 a share. Goldman and Morgan Stanley have the highest capital ratios among their peers and a strong risk culture, with an emphasis on valuing securities at market, or mark-to-market in Wall Street parlance, not their ultimate value at maturity. Its bond losses in a held-to-maturity portfolio were just $1 billion at year-end 2022, by far the lowest in its peer group. While investment banking activity could be muted in the coming quarters, trading activity could be strong, and that is where Goldman excels. The stock trades for nine times projected 2023 earnings of $34 a share. The firm believes it can generate annual earnings of $45 a share or more in a better environment. Morgan Stanley has successfully pivoted to wealth management under CEO James Gorman, and has been a standout. It is the only one of the top six banks to outperform the S&P 500 over the past five years. Citigroup, Wells Fargo, and Bank of America have all been in the red. Wealth management accounted for more than 40% of Morgan Stanley’s revenue and profits in 2022. The wealth management unit had pretax margins of about 30%. Schorr likes the relatively stable fee-based revenue at Morgan Stanley, and the fact that two-thirds of its loan book is made up of loans to wealth management clients, often collateralized by investment portfolios. “I love the story,” he says. Morgan Stanley stock, at $85, yields 3.5% and trades for 12 times projected 2023 earnings. That’s a premium to its peers but considerably below the market’s price/earnings multiple. Advertisement: Scroll to Continue Wells Fargo remains a work in progress as the company contends with fallout from dubious lending and other business practices in the past. That led to a still-imposed regulatory cap on assets and a $3.7 billion settlement with government regulators in late 2022. CEO Charlie Scharf called the settlement an “important milestone in our work to resolve historical issues.” Mark Stoeckle, manager of the Adams Diversified Equity fund, sees an opportunity for the bank to bring its cost structure in line with peers. Wells Fargo does mostly bread-and-butter deposit gathering and business and consumer lending. It has a relatively small wealth management business and little exposure to Wall Street. At $38, the stock trades for eight times projected 2023 earnings. It yields 3.1%. With a low dividend payout ratio, there is room for the dividend to rise in the coming years. The biggest banks, and many smaller ones, could be buffeted in coming days and weeks as the troubles surrounding First Republic and other banks play out. But these giants are positioned to prosper over the longer term, and their shares are inexpensive.
Banks Survived Another Week -The title of this thread is so comical. There is NOTHING to survive from. There is no banking crisis!! The failures of three regional banks are all very special cases due to some very specific circumstances. They were first of all small regional banks engaging in highly specialized business in specific industries, two were engaged in crypto-related activities and one concentrated in venture capital investment exclusively high tech. industry highly undiversified. And the entire banking industry of United States is being compared to them. LOL The rest of the banking industry is highly diversified in how they invest the deposits that they received. I don't know what's the problem. Anybody who's ever invested in long-term bonds before are going to have unrealized losses because the interest rates rose from the time that you bought them. So what? As long as you don't sell them, who cares? In the mean time, you are earning coupon payments. And when the bond matures, you are going to get all of your principal back. Think of them as locked-in multi-year term deposits that you put your money in when the interest rate was lower. Do you care now that the interest rate is higher? Why not? Because there is no tradeable market for term deposits? And yet just because the bonds are tradeable and you have to care? But if the bank is holding the bonds until maturity and is not really trading them, it's as if they have invested in long-term locked-in term deposits. It makes no difference. If it makes everybody easier, maybe what the government should do, instead of going all out and putting in more lending facilities and pledging more money (which is really defeating the purpose of raising interest rates and negating all of the Fed's efforts in reining in inflation because all the money that Fed is trying to take out from circulation, the Biden government is putting them right back in, the same as what they were doing during the pandemic), it should declare the long-term bonds to be non-tradeable. Since what everybody is worried about is this imaginary mark-to-market value, then why don't we just shut off the market, then there is no market and there would be no need to calculate this "mark-to-market" non-existent losses. There. LOL Now everybody can go to bed and rest easy. Your money is safe. Whatever is there is still there.