Latest thoughts on the banking sector (part 4)
In my past three e-mails, I've shared insights and recent presentation slides on the banking sector from my expert friend.
He wishes to remain anonymous, but he runs a very successful fund that only invests – long and short – in bank stocks. As I've said previously, he's the smartest bank analyst I know.
My friend thinks regional bank stocks in particular have gotten ahead of themselves, given the many headwinds he sees for the sector...
And he was proven exactly right when New York Community Bancorp (NYCB) reported disastrous fourth-quarter earnings on Wednesday, which crashed its stock by 38% that day and another 11% yesterday – dragging down the sector along with it.
Despite the many headwinds he has outlined – which I've shared in my recent e-mails, and will continue with today – and the fact that analysts expect 72% of banks will see earnings decline in 2024, bank stock valuations are back to their 10-year average price-to-tangible-book-value multiple:
But in reality, the situation is even worse... because banks' book values are inflated due to the fact that they aren't required to do fair-value marks on their held-to-maturity ("HTM") securities and loan portfolios.
If banks had to mark both down by a mere 5%, this would reduce their tangible book value by 33%!
In his presentation, my friend gives an example of Bank of Hawaii (BOH):
Here's the same analysis for the "Big Four" banks: JPMorgan Chase (JPM), Bank of America (BAC), Wells Fargo (WFC), and Citigroup (C):
But wait, it gets worse...
Historically, one way investors can make money owning smaller banks is if they get acquired, usually at a nice premium, which should be happening for many reasons – but the sector headwinds are making it unlikely:
As a result, bank merger and acquisition (M&A) volume has plunged to multidecade lows:
Lastly, here are my friend's conclusions:
Despite my friend's overall bearishness toward the sector, he does own some stocks in the sector – idiosyncratic situations that he thinks will do well despite the headwinds – which I'll cover in my next e-mail.
Stay tuned next week!
Best regards,
Whitney
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