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US Regional bank stocks - PNC Financial, TFS - Truist, USB- USB Bank, MTB - M&T Bank etc


Spekulatius

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Been looking at FHN.  Though in the past I have decided that I prefer banks big enough to scale/spread the tech spend and regulatory costs and own a big slug of Early Warning, LLC/Zelle/Mastercard part deux, which has been a cut off at USB/PNC/Truist level.  If I bought FHN, it would be predicated on reaching the scale via TD.

 

The key as ever to me is the strength of your float/low "deposit beta."  Probably gets lower for big banks (except citi) as the other guys get dealt (and hopefully shadow banks and crypto scumbags as well).  Guess that's the power of a money center/center of a network effect of money.

Edited by CorpRaider
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I think you can’t look at the asset side of a bank in isolation without looking at the liability side. The issue with mark to market aside, the simple fact remains that banks make more money at higher interest rates  than with ZIRP, because NIM tends to go up, up to a certain point.

 

That said, the deposit run is a risk, but we are not exactly in unchartered water with 4% interest rates either.

 

Personally, I like the super- regional banks better than the merge banks with an investment bank attached (JPM, BAC , C) but I do think that at least JPM achieves some synergies having both, the rest I am not so sure about.

Edited by Spekulatius
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I agree, having read Buffett, I primarily look at the liability side of the bank's balance sheet.  That's where the durable competitive advantages lie, if any [both more important and knowable in a Bayesian weighting sense].  I own BAC, WFC, and USB.  Agree on aversion to investment banking.  Good call on on the MTM losses by the way.  You were raising concerns weeks ago.  To me, it's a great example that if you don't have anything special (or in fact have something worse...such as concentrated deposits in excess of FDIC limits with a bunch of flighty, rich, financially unsophisticated aholes) you have no durable float and a levered crappy bidness.

Edited by CorpRaider
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@CorpRaider I felt the MTM losses were underreported at that time, but it’s now that it got everyone’s attention, it should not be the sole focus.

I think the possibility to pledge  securities with the Fed goes a long way to alleviate bank runs. If we indeed get more bank runs, I expect the limits on deposit insurance to get raised, because I think the Fed will do everything to protect banking from a meltdown because it would cause a meltdown of the economy with unthinkable consequences.

 

As far as an ownership is concerned, I own (and added recently) to USB and started positions in TFC and PNC. I do think that PNC has better management than TFC, but TFC is nicely positioned in the sunbelt, which gives them an organic growth advantage.

 

I believe the super- regionals should be able to handle any crisis just as well as the mega banks.

 

One of my biggest concerns related to macro is commercial real estate, especially office and to a lesser degree retail. Smaller banks, but also larger banks have heavy exposure to real estate lending and the interest rate changes are going to lead to lower valuations here.

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3 hours ago, Spekulatius said:

I think you can’t look at the asset side of a bank in isolation without looking at the liability side.

 

Absolutely - I think of it like this.........the asset side is all about culture and management....and its this side of the biz that ordinarily get the common equity holder zeroed..........you need uncommon common sense mgmt and prudence to run the asset side of bank....you need an underwriting culture........this is the hard part to be sure of in bank anyalsis. 

 

The liability side in some ways is easier IMO - does the institution display an ideally seasoned/historically verifiable low cost sticky deposit franchise.....diverse, un-concentrated, geared to stable or growing sectors/geographies such that you can model out that deposit base.

 

SVIB in some ways unusually got zeroed on both sides of the b/s......they messed up the asset side with duration risk........while not realizing they had a hugely correlated, concentrated and digitally flighty deposit base.....it was a fatal mix.

Edited by changegonnacome
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7 minutes ago, Spekulatius said:

One of my biggest concerns related to macro is commercial real estate, especially office and to a lesser degree retail. Smaller banks, but also larger banks have heavy exposure to real estate lending and the interest rate changes are going to lead to lower valuations here.

I think you can hedge that on the other side though. Cuz guess where theres tons of concentration in the office REIT sector? Tech and banks. For instance FRC is a big tenant of ESRT. 

 

Overall though I came around a little and started some WFC and TFC today. Think they are OK here, but wouldnt be shocked if prices get cheaper. These banking issues are never one and done. 

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Good thread. I've owned USB for some time and bought some TFC today. From what I can gather, USB has 37% insured deposits and TFC about 43% insured (compare to 3% for SIVB and 6% for SBNY). I think the deposit quality is high. Both look attractive from a pure valuation/dividend yield perspective.

 

As to CRE loans, my research shows USB has ~14.5% of all loans in CRE vs ~7% for TFC. This doesn't seem far off from WFC has 16.5% while BAC is 6%. I actually noticed that it seems CATY has pretty high CRE exposure--about 49% of its loans or 3.5 times its equity. 

 

TFC also has a large Top 10 insurance brokerage which was recently valued at ~$15B and the co is set to receive ~$2B in cash in Q2 for a sale of 20% of it.

 

USB owns Elavon which is a top payments processor (supposedly half a trillion $ in transactions per yr) but I haven't uncovered too much about it.

 

Both TFC and USB are part owners in Zelle/Early Warning Services.

Edited by Dalal.Holdings
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@Dalal.Holdings Thanks for the summary, i was aware of the insurance transaction. It is interesting that the insurance brokerage business is worth a substantial part of TFC market cap. I followed TFC when they were BBT for a while and never really liked management too much as I think they overpromised and underdelivered. That said, the shares seemed habe taken quite a beating for a bank with this quality and particular the demographic tailwind in their operating area.

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So it seems like the issue is depositors want insured deposits + higher rates. Banks want low cost deposits + want to avoid runs. Anyone familiar with the insured deposit sweep. Seems like it or something like it solves the problem (although at the expense of NIMs for banks) Bank has its assets. Customers has its higher yield. 
 

it’s somewhat infuriating how difficult banks have made treasury mgmt. opening a fidelity account with checking and having it sit in spaxx seems so easy that everyone should be able to do it. 

 

https://www.umb.com/institutional-banking/investor-banking-services/fdic-sweep-program

 

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3 hours ago, Dalal.Holdings said:

USB owns Elavon which is a top payments processor (supposedly half a trillion $ in transactions per yr) but I haven't uncovered too much about it.

 

Merchant services is indeed the key reason USB comes out well in Fed's severely adverse scenario, where according to Fed it is one of the few banks that makes money even during severely adverse scenario on page 19 at https://www.federalreserve.gov/publications/files/2022-dfast-results-20220623.pdf . 

 

Clearly, Fed got a lot of things wrong, especially with Charles Schwab. So, take the stress test results with a grain of salt. 

 

For commercial real estate losses, I'd just double/triple the losses that Fed is assigning to each bank to see how each bank would do.  US Bank does do much better than PNC with CRE losses that way. 

 

That said, I think US Bank's merchant services is facing some threat from Stripe, Square, Paypal, etc., and eventually Apple.   Does anyone know deeper how much threat, and how much longevity US Bank's merchant services have left?   I'd have thought it was a sticky space, but somehow competitors have been growing by leaps and bounds. 

 

I was surprised to hear Munger mention how well Stripe is doing in a recent video.  Wonder if that's one of the reasons why Buffett sold USB. 

 

Also, looking through the most recent earnings transcript, looks like they took 180 basis points impact on CET1 as a result of the Union Bank acquisition that they need to work through at a time like this.  Anyone looked into that? 

 

 

Edited by LearningMachine
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3 hours ago, Spekulatius said:

@Dalal.Holdings Thanks for the summary, i was aware of the insurance transaction. It is interesting that the insurance brokerage business is worth a substantial part of TFC market cap. I followed TFC when they were BBT for a while and never really liked management too much as I think they overpromised and underdelivered. That said, the shares seemed habe taken quite a beating for a bank with this quality and particular the demographic tailwind in their operating area.

 

All BB&T management is gone, it's all Suntrust executives now. It's up for you to decide if that's a positive or a negative. I don't have a high opinion of them. 

 

Also you guys that are factoring in EWS as a factor in making investing decisions. It's literally a rounding error, even among the banks' other equity investment positions. 

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I picked up some TFC, USB, PACW, FHN, BAC. And finally decided to pick up some KRE to make it easier.

 

I think the FDIC will come up with a greater insurance mechanism. Up the limit to $1 million maybe and then infinite coverage if you go above with an extra fee? Just making up things.

 

Point is the govt isn’t going to let them die.

 

Theres also a liquidity crunch which should help them solve the inflation problem somewhat I think. Every bank in the country is scrambling for cash I bet.

 

The event itself was very deflationary which is good if you don’t want rate hikes which is good for the HTM/AFS portfolios. Circular I know….

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I don't see how this crisis is solved yet, the bank run is not over. If the big banks are getting more deposits and the money is coming from the smaller banks, there will be more bankruptcies or perhaps the zombie banks will be merged with bigger banks? In either case, shareholders probably get nothing. Maybe someone can enlighten me on how this crisis will be solved and which banks are immune to this virus.

 

This spreadsheet was circulating on Tweeter, I don't know how accurate it is:

https://docs.google.com/spreadsheets/d/1dROQQuJmoLbrNgkM3ZYiuvVzj3dfRw2LESsIP7t5u5c/edit#gid=0

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6 hours ago, Mephistopheles said:

I picked up some TFC, USB, PACW, FHN, BAC. And finally decided to pick up some KRE to make it easier.

 

I think the FDIC will come up with a greater insurance mechanism. Up the limit to $1 million maybe and then infinite coverage if you go above with an extra fee? Just making up things.

 

Point is the govt isn’t going to let them die.

 

Theres also a liquidity crunch which should help them solve the inflation problem somewhat I think. Every bank in the country is scrambling for cash I bet.

 

The event itself was very deflationary which is good if you don’t want rate hikes which is good for the HTM/AFS portfolios. Circular I know….

The banking crash is basically quantitative tightening. Banks are one of the main transmission for the Fed because they lend to Main Street. Banks collectively will probably increase the liquidity on their balance sheet, which means they buy less securities and lend less. Thats basically monetary tightening.

 

Now we have banking stocks crashing in Europe as well, caused by CS of course.

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47 minutes ago, Dalal.Holdings said:

So bank tightening —> less inflation/deflation —> lower rates —> HTM securities rise in value

 

And yet lower rates might not be fantastic for NIM but I think it’s less likely Fed goes all the way back down to ZIRP

 

This whole issue just shows how addicted to ZIRP we've become. Every f-boy pundit is screaming their head off for rate cuts. Has JPow overdone it? Yeah, maybe idk....I do think the hikes were way too fast. 

 

"Like a junkie kicking a bad habit"

Edited by Castanza
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15 hours ago, Spekulatius said:

This is the thread to discuss US regional bank stocks. The SIVB and Signature bank failure has caused a decline in regional bank stocks that I think is a buying opportunity. Let’s discuss.

 

Are regional banks investments you like to hold long term, or do you try to swing in and out to take advantage of the volatility?  I ask because I've generally avoided banks due to the (perceived by me at least) inherent leverage and black box nature of their balance sheets and the 10-year returns on many of the regional banks (MTB, USB, TFC) look quite poor.

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30 minutes ago, KJP said:

 

Are regional banks investments you like to hold long term, or do you try to swing in and out to take advantage of the volatility?  I ask because I've generally avoided banks due to the (perceived by me at least) inherent leverage and black box nature of their balance sheets and the 10-year returns on many of the regional banks (MTB, USB, TFC) look quite poor.

It really depends on the trajectory of the share prices. I always say that everything in my portfolio is for sale at any time for the right price. So if regional bank prices bounce back quickly by let's say 25%, I would likely sell. 

 

I do think we are looking at more long term issue, so my guess is that it's not going to be a quick trade. In any case, i wanted to create a thread to put the knowledge / input that posters here in one place.

 

Generally speaking, I only buy bank stocks if there is a crisis of some sort and that seems to be the case right now. it's only then when the questions about balance sheet and quality of loans come up. The share price swings associated with these changes in sentiment can be huge, so there is a significant opportunity to make some real money.

 

 

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11 minutes ago, Spekulatius said:

Generally speaking, I only buy bank stocks if there is a crisis of some sort and that seems to be the case right now. it's only then when the questions about balance sheet and quality of loans come up. The share price swings associated with these changes in sentiment can be huge, so there is a significant opportunity to make some real money.

 

 

 

Yes, that certainly seems to be the case.  What is your view on something like Western Alliance?  Too much of a gamble?

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