JEast Posted June 14, 2018 Share Posted June 14, 2018 From about 1986 thru to 1992, US banks in general had a tough time with the S&L crisis where over 1,000 banks were closed and that also included a nice recession in ’90-‘91. Near the end of this terrible period, you could buy banks for 60-80% of TBV and all paying a healthy dividend. Then, coming out of that period the banks had a long runway for 10-15 years only culminating in the beginning of the ’07 crisis. It took nearly six years to clean up the mess the first time and appears that it has taken about 8 years to clean up the mess second time. What’s different now versus the ’86-’92 period? A lot. There were roughly 12,000 banks in the US in 1992 and today their are less than 4,900 due to consolidation and Dodd/Frank pushing smaller banks out, and Now, the top 10 banks capture the vast majority of all US deposits. The regulatory capture has also made the largest banks even in a more advantageous position with the ‘stickiness’ of IT, such as, Winner takes all effects with digital and ongoing with Fintech R&D (e.g. what small bank can afford an annual $500m spend on cybersecurity). Also, Buffett gave a big thumb up to banking last year with his BAC conversion and Dimon says it is just the sixth inning. That is the US from a very cursory look, but what about Europe, the UK, and maybe Africa? In essence, the UK is about two years behind the US and selective opportunities in Europe are a year or two behind the UK. Also, the European regulators are forcing banks to up their IT game and only the bigger banks can afford this ongoing expense. Again, the biggest banks appear to be locking in customers in a somewhat annuity type outcome, as the stickiness of IT will keep customers for a long time. In addition, some big banks in the UK may even have better IT presently then in the US and are selling at only 70-90% of TBV. In addition, with the ‘ring fencing’ in the UK is the financial risk reduced more due to a more centric domestic market? Outside of the UK, there are some European banks with similar attributes and are selling for significantly less but maybe a little more political risk. What makes some of these non-US banks seem interesting, along with the current low valuation with potentially annuity type returns going forward, is that they are actually cheaper than they appear due to the recently adopted IFSR9 (booking loan losses up front). From a value perspective — this up front loss acts like additional margin of safety — does it not (e.g. many banks took 10-15% equity adjustments for anticipated loans losses)? One could make an educated guess that loan-to-value-plus-collateral is better today than 10 years ago and this pro-cyclical accounting adoption should make the banks even more overcapitalized over the next few years, maybe longer. As for the UK challenger banks, they have made good progress but its been easy pickings and their IT spend going forward will catch up to them eventually. So and if we are in the sixth inning in the US as some have suggested, then Europe, the UK, and maybe Africa are only in the second or third inning. What say our UK and European friends? Link to comment Share on other sites More sharing options...
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