Latest Thoughts on Buying Bank Stocks

We are a month into this banking crisis. I still don’t really know what I want to do about it. It’s why I haven’t said much about it. My opinion keeps waffling. And it depends on exactly which banking crisis we are talking about. What have I done? Not much. I’ve taken small positions in a few small banks – BSVN, SBFG and EQBK. I’ve bumbled around a few times with the larger regional banks (KEY, MTB, RF) on a small scale, buying each on a couple occasions but chickening out of the positions within a day or two. While many (including JPM head Jamie Dimon) are saying we are coming to the end of the banking crisis, I’m not sure enough that the coast is clear to buy confidently into these names just yet. Dimon is likely right though – the acute phase is probably over. At least this particular acute phase is over. The rapid flight of deposits, of bank runs, maybe more importantly the fear of bank runs, seems in the past. But I made this tweet about what I was more concerned about (flight not fight). This situation makes me uncomfortable. Maybe more uncomfortable than just watching SIVB and FRC wobble on the precipice over a weekend. What I don’t like about the “drip” scenario is that there is really nothing imminent. Its just what I said in the tweet – a drip, drip, drip of higher deposit costs for virtually every bank out there, acting like a frog in ever-warming water (is that really a thing?) leading to a slow boil on each incremental loan these banks make. At least with FRC or SIVB someone had to do something. But with this “drip” scenario no one is really going to care. Except earnings at the banks are going to slip, loan growth will slow then stop and then loans overall will subsequently decline. I’m not really sure where it goes from there except one of my key precepts is that things will turn out ok as long as credit grows and this situation isn’t good for credit which means it isn’t good for things. As for the banks themselves, it’s really hard to forecast what their earnings are going to be. Almost all the banks seem extremely cheap on last years numbers. And many are now cheap on a Price/Tangible Book. But forward earnings… well I just don’t know. Banks always talk about deposit beta. That is the portion of Fed Funds that is passed on to borrowers. Last year betas got into the high-teens and low 20s. Last quarter I was seeing estimates that betas would peak in the mid-30s. That would mean on a 5% fed funds rate, deposit rates would get to 1.75%. But this is for interest bearing deposits. Most banks have a decent amount of non-interest bearing deposits as well. I’m never really sure how the banks are factoring in non-interest bearing moving to interest bearing in their forecasts. I wonder, with the events of the last month, how many non-interest bearing deposits have taken a closer look and realized they have options. What I do know is that you can get some ugly earnings numbers by playing with higher beta assumptions and especially assumptions that non-interest bearing deposits move to the interest side. After what we’ve seen over the last month it is almost certain that deposit rates are going higher than they were before. I don’t think 2.5% as a peak is out of the question. That would still be way less than you can get in the money-market. What does that mean for banks? Well, here are 3 banks that I have looked at carefully over the last month. I owned both KEY and MTB on two occasions but didn’t have the gumption to stick with them. All I’ve done is taken the numbers from the 10-K, looked at the deposit distribution and added the additional interest expense from deposit rates going to 2.5%. Of the 3, Comerica comes out looking the best. Earnings per share only fall from $8.47 per share to $4.41 per share. MTB sees earnings fall from over $11 per share to $3.48. KEY goes negative. Comerica looks the best because they have so many non-interest bearing deposits. But is it really realistic that all these deposits stay in that bucket? What if 25% of them go interest bearing? Those numbers are getting ugly. Key has a loss. If you really want to get negative, just assume the overall deposit costs get to 2.5%. Each of these banks is suddenly deep in the red. Yikes! Of course, whether that, or any of these scenarios, happen is up for debate. I’m simplifying a lot here – mostly on purpose to present just how sensitive these banks are to rising deposit costs. But there is bound to be a lot more going on than just deposit betas. And none of this happens overnight. Its gotta be at least another year before deposit costs creep up to this level. But what happens if this, relatively benign scenario plays out: Inflation continues to come down but it is just a touch sticky. We can’t seem to sustain 2%. We start thinking 3% is best we can do. The economy doesn’t fall out of bed, it does what it has been doing, which is performing pretty, pretty good. The Fed funds is still at 5% in the summer of 2024 and there is no sign they are cutting any time soon. Man, some of those bank earnings are going to look really bad if that happens. And that makes me nervous. Because that doesn’t seem like a world in equilibrium. [Image] Here are Some More Investing Tips and Resources. Enjoy! Sponsored [Book In A Call With Guy's Team Now & Secure A Complimentary Ticket Upgrade Worth $1,000]( [Latest Thoughts on Buying Bank Stocks](?site= We are a month into this banking crisis. I still don’t really know what I want to do about it. It’s why I haven’t said much about it. My opinion keeps waffling. And it depends on exactly which banking crisis we are talking about. What have I done? Not much. I’ve taken small positions in a few small banks – BSVN, SBFG and EQBK. I’ve bumbled around a few times with the larger regional banks (KEY, MTB, RF) on a small scale, buying each on a couple occasions but chickening out of the positions within a day or two. While many (including JPM head Jamie Dimon) are saying we are coming to the end of the banking crisis, I’m not sure enough that the coast is clear to buy confidently into these names just yet. Dimon is likely right though – the acute phase is probably over. At least this particular acute phase is over. The rapid flight of deposits, of bank runs, maybe more importantly the fear of bank runs, seems in the past. But I made this tweet about what I was more concerned about (flight not fight). This situation makes me uncomfortable. Maybe more uncomfortable than just watching SIVB and FRC wobble on the precipice over a weekend. What I don’t like about the “drip” scenario is that there is really nothing imminent. Its just what I said in the tweet – a drip, drip, drip of higher deposit costs for virtually every bank out there, acting like a frog in ever-warming water (is that really a thing?) leading to a slow boil on each incremental loan these banks make. At least with FRC or SIVB someone had to do something. But with this “drip” scenario no one is really going to care. Except earnings at the banks are going to slip, loan growth will slow then stop and then loans overall will subsequently decline. I’m not really sure where it goes from there except one of my key precepts is that things will turn out ok as long as credit grows and this situation isn’t good for credit which means it isn’t good for things. As for the banks themselves, it’s really hard to forecast what their earnings are going to be. Almost all the banks seem extremely cheap on last years numbers. And many are now cheap on a Price/Tangible Book. But forward earnings… well I just don’t know. Banks always talk about deposit beta. That is the portion of Fed Funds that is passed on to borrowers. Last year betas got into the high-teens and low 20s. Last quarter I was seeing estimates that betas would peak in the mid-30s. That would mean on a 5% fed funds rate, deposit rates would get to 1.75%. But this is for interest bearing deposits. Most banks have a decent amount of non-interest bearing deposits as well. I’m never really sure how the banks are factoring in non-interest bearing moving to interest bearing in their forecasts. I wonder, with the events of the last month, how many non-interest bearing deposits have taken a closer look and realized they have options. What I do know is that you can get some ugly earnings numbers by playing with higher beta assumptions and especially assumptions that non-interest bearing deposits move to the interest side. After what we’ve seen over the last month it is almost certain that deposit rates are going higher than they were before. I don’t think 2.5% as a peak is out of the question. That would still be way less than you can get in the money-market. What does that mean for banks? Well, here are 3 banks that I have looked at carefully over the last month. I owned both KEY and MTB on two occasions but didn’t have the gumption to stick with them. All I’ve done is taken the numbers from the 10-K, looked at the deposit distribution and added the additional interest expense from deposit rates going to 2.5%. Of the 3, Comerica comes out looking the best. Earnings per share only fall from $8.47 per share to $4.41 per share. MTB sees earnings fall from over $11 per share to $3.48. KEY goes negative. Comerica looks the best because they have so many non-interest bearing deposits. But is it really realistic that all these deposits stay in that bucket? What if 25% of them go interest bearing? Those numbers are getting ugly. Key has a loss. If you really want to get negative, just assume the overall deposit costs get to 2.5%. Each of these banks is suddenly deep in the red. Yikes! Of course, whether that, or any of these scenarios, happen is up for debate. I’m simplifying a lot here – mostly on purpose to present just how sensitive these banks are to rising deposit costs. But there is bound to be a lot more going on than just deposit betas. And none of this happens overnight. Its gotta be at least another year before deposit costs creep up to this level. But what happens if this, relatively benign scenario plays out: Inflation continues to come down but it is just a touch sticky. We can’t seem to sustain 2%. We start thinking 3% is best we can do. The economy doesn’t fall out of bed, it does what it has been doing, which is performing pretty, pretty good. The Fed funds is still at 5% in the summer of 2024 and there is no sign they are cutting any time soon. Man, some of those bank earnings are going to look really bad if that happens. And that makes me nervous. Because that doesn’t seem like a world in equilibrium. 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