By Philip van Doorn, MarketWatch
Marinac agrees that large banks’ dividends are “very secure.” He said that aside from “a one-time reserve” for expected loan losses from the coronavirus outbreak’s economic slowdown, “bank earnings will continue to be positive.”
“I still think they will make money off collecting interest. Banks are still accruing interest every hour of every day,” Marinac said.
Ian Lapey, portfolio manager of the Gabelli Global Financial Services Fund /zigman2/quotes/205810611/realtime GFSIX +1.36% , pointed to the Federal Reserves’s annual Comprehensive Capital Analysis and Review, known as CCAR, as evidence that the largest U.S. banks are well-prepared for the coronavirus crisis. Each year, the regulator tests the largest U.S. bank holding companies’ ability to withstand a “severely adverse” economic scenario.
“The June 2019 severely adverse scenario assumed 10% unemployment and a stock market decline of 50%. But even in that scenario, none of the banks tested would have to raise dilutive capital,” Lapey said during an interview. When a company issues new common shares to raise capital, the ownership position of its shareholders before the new issuance is diluted.
“I don’t see that happening under this scenario,” Lapey said, when asked if any of the big U.S. banks would have to issue new common shares, even though he “certainly” expects a global recession.
Lapey agrees with the other analysts that it was important for the big banks to suspend share buybacks. “It is better to invest in your business,” he said, adding that “at the end of the day, not buying back stock, for however long it is, will have a much smaller impact on shareholder returns than it would be if they mismanaged their balance sheets or missed out on [increased] lending opportunities.”
Lapey pointed to Citigroup, the largest holding of the Gabelli Global Financial Services Fund, as an example of how well-prepared the banks are: “If you compare their capital position now, to what it was going into the last financial crisis, it is remarkable. Assets to tangible book value in 2007 was 43 times and now it’s 13 times.”
He called Citi “incredibly attractive,” with shares selling well below tangible book value.
Charles Lemonides, founder of ValueWorks in New York, called Goldman Sachs another excellent value for long-term investors. “They don’t seem to be dangerously positioned in any area. Your upside is 50% to 100% over a two-year time frame,” he said.
The big 15
Here are price/tangible book value ratios, dividend yields and 2020 total returns for the 15 largest U.S. banks by total assets:
|Company||Ticker||Price/ tangible book value||Dividend yield||Total return - 2020 through March 16|
|J.P. Morgan Chase & Co.||/zigman2/quotes/205971034/composite JPM||1.47||4.07%||-36%|
|Bank of America Corp.||/zigman2/quotes/200894270/composite BAC||1.06||3.52%||-42%|
|Citigroup Inc.||/zigman2/quotes/207741460/composite C||0.59||4.95%||-48%|
|Wells Fargo & Co.||/zigman2/quotes/203790192/composite WFC||0.79||7.70%||-50%|
|Goldman Sachs Group Inc.||/zigman2/quotes/209237603/composite GS||0.72||3.23%||-32%|
|Morgan Stanley||/zigman2/quotes/209104354/composite MS||0.79||4.42%||-38%|
|U.S. Bancorp||/zigman2/quotes/206934678/composite USB||1.51||5.16%||-45%|
|Truist Financial Corp.||/zigman2/quotes/200481602/composite TFC||1.08||6.58%||-51%|
|PNC Financial Services Group Inc.||/zigman2/quotes/203416310/composite PNC||0.97||5.11%||-43%|
|Capital One Financial Corp.||/zigman2/quotes/204480509/composite COF||0.59||2.89%||-46%|
|Bank of New York Mellon Corp.||/zigman2/quotes/200171276/composite BK||1.51||4.25%||-42%|
|State Street Corp.||/zigman2/quotes/209758976/composite STT||1.44||4.36%||-40%|
|Ally Financial Inc.||/zigman2/quotes/206227672/composite ALLY||0.43||4.72%||-47%|
|Fifth Third Bancorp||/zigman2/quotes/207561596/composite FITB||0.65||7.83%||-55%|
|Citizens Financial Group Inc.||/zigman2/quotes/205410375/composite CFG||1.23||5.63%||-41%|
”Banks trade on tangible book value and earnings. Three weeks ago we began to focus on tangible book value,” Marinac said, because of the decline in bank stock valuations.
Because of the share-price declines and low valuations, members of Konrad’s team at D.A. Davidson upgraded their ratings to “buy” for these five smaller regional banks March 16:
Glacier Bancorp /zigman2/quotes/205050669/composite GBCI +2.49% of Kalispell, Mont.
HomesStreet Inc. /zigman2/quotes/200084665/composite HMST +3.95% of Seattle.
Independent Bank Corp. /zigman2/quotes/203876719/composite INDB +4.64% of Rockland, Mass.
Luther Burbank Corp. /zigman2/quotes/200114134/composite LBC +4.51% of Santa Rosa, Calif.
Renasant Corp. /zigman2/quotes/200892803/composite RNST +4.86% of Tupelo, Mississippi.
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