The Loughran family lived next door to my grandparents in Paramus, NJ when I was a child. I have memories of sneaking, as a young boy, across the grass over to Mrs. Loughran’s backdoor to pick a few candies from a dish in her living room. Mrs. Loughran apparently shared that, when she asked me what I intended to do when I “grew up,” I responded that I wanted to be a banker. I was roughly Holger’s age at the time.
I did not follow a career path in banking. The paradox of banking, for me, was summarized a few years ago at NYU-Stern. While studying in two different finance classes (Global Financial Architecture and Turnaround and Financial Distress) our two professors, on the same day, asked the same question of us: “What is this field [finance] about?” Each professor answered his own question. The first responded, “Making money!” In the subsequent class, the professor responded, “Social welfare!” Indeed.
The financial industry is quite, quite old and has been through many gyrations. The industry spans the “money changers” in the Bible through the time of the Medici Bank in 15th century Florence to 1982 Sears. Yeah, remember this…
Sears to Open Financial Supermarket By James L. Rowe Jr. and David Vise July 16, 1982 For most of its 96-year history, Sears, Roebuck & Co. has stood for paint and appliances, clothing and catalogue sales. On Monday, shoppers arriving at a Sears store in suburban Virginia will find a flashing electronic tickertape, welcoming them to "the new Sears Financial Network." In a cluster of offices near the candy and nuts department, Sears will be selling and buying houses, stocks, bonds and money market funds, opening Individual Retirement Accounts and writing insurance for cars and homes. The new Sears department in Fair Oaks Mall at the intersection of Rt. 50 and Interstate 66 in western Fairfax County is the first of a wave of "financial supermarkets" that will be opening in banks, stores and shopping malls in the coming decade. Dozens of companies, most of them in one branch of the financial services industry, are making plans to broaden widely the kinds of products and services they offer customers in the belief that, as the financial world gets riskier and more complicated and the types of investments proliferate, shell-shocked consumers will find it easier to do all their financial business under one roof.
On Friday evening I received an email from a friend about his investment in a privately held bank and its recent performance. Aside from passive investments in ETF and mutual funds, I also own individual stock positions, including $PNC, $WFC, $JPM, and $BK. I pulled some research from Fidelity to look at the size, P/E, and P/B at these large banks (as well as BOA).
It is interesting to me that these banks have a market value of equity ranging from as low as 0.84x book to 1.73x book; The corresponding range of ROE (ttm) is 1.06% to 11.53%. This seems like abysmal performance, granted during a global pandemic and economic recession. It turns out there is a ton of data available about bank performance and financial condition on the FDIC website; Wrestling with this data was one of the first efforts I made as I started to teach myself Python (brief blogpost here). I continue to think about how to work with this data, including creating a connection between Python and SQLite to manage the data in a different way, but I am struggling to get that to fit together properly. In the meantime, I wrote a program yesterday to visualize a simple distribution of bank ROE for six states against average assets (including an embedded plot focused on banks with less than $5bb of assets and a dotted line @ 10% ROE.)
Aside – if, upon reviewing the data in the above set of charts, the NY efficiency ratio value leaps off the page as confusing, as it did to me, I looked a bit closer. I don’t have a great response, other than there are seemingly more “unusual” filings, such as foreign banks which are unreported (ref. State Bank of India and The Bank of East Asia Ltd for two examples) as well as other banks that are probably unique, such as “MORGAN STANLEY PRIVATE BANK, NATIONAL ASSOCIATION” (cert. 34221) as well as “METROPOLITAN BANK AND TRUST COMPANY” (cert. 33656). I suspect that a disproportionate number of such banks distort the median efficiency ratio quoted, but I am not certain…
The way I think about positioning of banks and their opportunity to return value includes the following:
- Who are the customers?
- What service lines are offered by the bank? What are the associated risks, growth rates, margins?
- What is the geography?
For some bank services, there are quite detailed reports available on the FDIC, as well. For example, here are deposit market share detail for three central-PA markets captured by two Pennsylvania banks:
So, in a 2021 context that includes new approaches to monetary policy, decentralized finance with block-chain and crypto-currencies, other emerging financial technology, a milieu that includes non-bank participants, as well as risks of additional regulation (on top of Basel III and Dodd-Frank), what is the outlook for common equity holders of US commercial banks? I am not sure, but as I write this post and think further about current trends and the regulatory outlook, I am feeling less confident that my individual holdings of US banks makes sense… I will continue to hold them, though, and thank heavens I wasn’t a recent shareholder of $SHLDQ! (For a recap of recent history at Sears, read this).
