Evaluating the Investability of Banks Amidst Financial Turbulence

Please text and tell us what you like

Could your hard-earned money be doing more for you outside the banking sector? That's what Clem  and Steve dissect in an eye-opening chat about the investability of banks, especially given the recent tremors felt across financial institutions like Silicon Valley Bank and New York Commercial Bank. We're breaking down the recent bank failures that have sent ripples through the investment community, scrutinizing the resilience of regional bank stocks, and questioning the allure of banking investments in a market that's bursting with other opportunities. 

Join us as we peel back the layers of the banking industry's 'black box' with Clem's expert perspective. He brings to the table a wealth of experience and historical data that reveal a stark contrast between the performance of bank ETFs and the S&P 500, prompting us to consider the true value of bank stocks in our portfolios. As we navigate through the complexities of asset liability management, credit quality, and the often opaque inner workings of financial institutions, we unpack the lessons from Silicon Valley Bank's downfall and explore what it really means for the savvy investor seeking resilient and profitable ventures.

Straight Talk for All - Nonsense for None


Please check out our other podcasts:

https://skepticsguidetoinvesting.buzzsprout.com

Episode Transcript

Steve Davenport (00:02):
Hello and welcome to Skeptics Guide to
Investing.
I'm Steve Davenport and in thispodcast, clem Miller and I will
be briefly discussing a bigtopic our banks investable.
Of course.
Last year we saw the failure ofSilicon Valley Bank, signature
Bank and First Republic.
These failures impacted theshare prices of many regional
bank stocks.

(00:22):
This year, we're seeing somecontinued pockets of instability
, most notably New YorkCommercial Bank.
Clem, you usually don't holdany bank stocks in your personal
portfolio.
Is that because you expectwidespread failures?

Clem Miller (00:39):
No, the issue for banks is not that a lot of banks
will fail.
Obviously, there's a mechanismwith the FDIC that ensures that
banks, or at least depositors,are protected.
Also, the FDIC is involved inhaving larger banks acquire

(01:00):
smaller trouble banks.
So it's not a question reallyof bank failures.
It's really a question ofwhether bank stocks are better
investment opportunities thanstocks that aren't banks.
I just happen to believe thatbank stocks are not as great an
investment opportunity as othertypes of stocks.

Steve Davenport (01:23):
I wouldn't have anything to do with your
experience working for banks,would it?

Clem Miller (01:28):
No, not at all.

Steve Davenport (01:30):
So if the real issue is in who will fail, but
whether there are better stocksthat you could select for your
portfolio, do you havehistorical data or price
performance for banks?

Clem Miller (01:40):
Yes, I do so.
If you look at US banks, andthis is the bank ETF, the
one-year total return for banksis minus 10% versus plus 23% for
the S&P 500.
That's as of yesterday.
The three-year total return forbanks is minus 1.8% versus plus

(02:04):
31.9% for the S&P 500.

Steve Davenport (02:08):
So a huge difference, let's not keep it up
with inflation too well, is it?

Clem Miller (02:12):
Yes, not at all.
And the five-year yes, banksare up 11.37% five-year total
return, but this is against96.38% for the S&P 500.
So investing in a bank is justinvesting in banks is just not
as good as investing in theoverall market, much less some

(02:35):
individual stocks.

Steve Davenport (02:38):
I agree that banks haven't been great
investments historically.
Why do you think that's thecase?

Clem Miller (02:45):
So investors, really, they look at banks and
they say, well, it's hard tounderstand what's really going
on inside a bank.
You know it's asset liabilitymanagement, the rates they're
charging, the credit quality oftheir loans.

(03:05):
It's very hard for somebody onthe outside to be able to
interpret those things.
Even the ratios that people useto look at investments are
different for banks than theyare for other things.
So really I think mostinvestors consider banks to be
essentially black boxes.
That is very difficult tounderstand, and I consider them

(03:29):
to be black boxes too.

Steve Davenport (03:32):
Well, it might be hard for many investors to
consider them unfathomable blackboxes.
I think many bank analysts andrating agencies might disagree
with you.
Why do you even bother to tryto analyze banks?

Clem Miller (03:47):
So yeah, I mean the thing about bank analysts and
about rating agencies is theyactually get paid for analyzing
banks and in addition to that,Do you think that colors their
characterizations?
No, I think it's.
You know it doesn't color theircharacterizations, but what it
does is it gives the I would saythe appearance that banks are

(04:15):
just as good an investmentopportunity as others, as other
sectors, and I just think it'svery difficult to analyze what's
inside a bank compared to, say,what's in some other industries

(04:35):
.
The Buffett and Munger and themsaid you got to understand what
stocks are and do and theyspent a lot of time trying to
get into stocks and tounderstand stocks and I think
even they have said that banks,while some might be good

(04:56):
opportunities, they're verydifficult to understand.

Steve Davenport (05:02):
So I think we need to drill down a little bit
on this black boxcharacterization.
I imagine one concern you haveis a repeat of what happened
with Silicon Valley Bank.
Can you remind us there?

Clem Miller (05:14):
What happened?
Okay.
So what happened there was thatyou had a situation, okay.
So Silicon Valley Bank had alot of loans into the tech
sector, including venturecapital and startups in the
Silicon Valley area and bySilicon Valley I don't mean just

(05:34):
geographically Silicon Valley,but the whole tech complex and
what happened was that a lot of,there was a lot of problems
with this sector, which resultedin lots of very well publicized
layoffs.
A lot of these companiesstarted defaulting on these
loans and Silicon Valley Bankhad to liquidate some of their

(05:57):
investments, that is, their bondinvestments, in order to cover
these defaults.
And so, by liquidating theseassets, these bond assets, per
accounting rules, what they hadto do was mark down all the

(06:18):
remaining bonds, and when theydid that, they fell into a
negative capital position andhad to be taken over.

Steve Davenport (06:28):
Yeah, I think the information moved very
quickly as well.
I mean, that's what I wasamazed at is that people could
just go on their phone and clicksend and that cash comes out
very quickly when they getworried.
We're now seeing some problemswith New York Commercial.
What's going on there?

Clem Miller (06:44):
So New York Commercial Bank basically has
two problems.
One problem is that it had alot of loans into the
rent-controlled residentialspace in New York.
Now, this is a problem becausea lot of those, a lot of those
loans have resets up to higherrates and they just can't the

(07:09):
companies that rent theseapartments out to the
rent-controlled residents theyjust can't come up with the
money to cover the rates onthese loans.
So, yeah, they're facingdefaults on a lot of those loans
.
Plus, also, commercial realestate on the commercial side is

(07:32):
having problems in New Yorkthanks to the hangover from the
pandemic, the move to return tooffice hybrid, you name it, lots
of vacancies in office realestate, and that's an area where
New York Commercial Bank has alot of exposure, as do a lot of
other banks.

Steve Davenport (07:53):
I can understand, lending in the
rent-controlled space seems likea little bit of a idiosyncratic
issue because that's specificto only a few banks.
But I can see where commercialreal estate may be a big problem
for a larger group of banks.
But can't you just look at thebalance sheet to figure out
their exposure to commercialreal estate?

Clem Miller (08:12):
Well, you might be able to figure out what the
absolute number volume of theseloans are dollar value but it
doesn't tell you anything aboutthe balance sheet.
It doesn't tell you really muchabout what the true value of
these loans are.
What's the true value of thecollateral underlying the loans?

(08:33):
How much will this have to bewritten down if you've got
defaults?
It doesn't tell you much aboutwhether they're rolling over
these loans and what the termsare of the rollovers.
There's a lot you can't figureout just by looking at a balance
sheet, and even the notes tothe financial statements too,

(08:54):
it's hard to figure out.

Steve Davenport (08:59):
Some value investors are attracted to banks
because of their low valuationsrelative to stocks in other
industries, such as technologyor healthcare.
What do you make of thisargument?
Is it good value?

Clem Miller (09:12):
Well, one thing that you can look at is, on the
positive side, to give banks thebenefit of the doubt.
You can look at banks'valuations relative to their
valuations over time.
That's one way you can look atit.
But I think it's inappropriatereally to look at bank stocks as

(09:33):
being cheap just becausethey're cheap relative to
technology and healthcare.
That's again because they'reblack boxes.
That's because theopportunities lying ahead for
banks are less than those fortech stocks and healthcare
stocks.
Just because they're blackboxes that are more difficult to

(09:53):
understand, their valuationsare naturally priced down.

Steve Davenport (10:01):
They may be cheap, but cheaper a reason I
get the banks are highlyregulated, but why isn't that a
good thing?
Shouldn't that make it safe forus?

Clem Miller (10:14):
Okay, well, okay.
I would say that from thestandpoint of a depositor, bank
regulations are good, but notnecessarily.
And from the point of view ofsociety as a whole, bank
regulation is good.
But the problem is is thatregulation is not necessarily

(10:36):
good from a shareholderperspective, and this is true in
other industries as well.
The more regulation you have,the more difficult it is to
actually really to actually makemoney.
It has an impact on the bottomline.
It reduces the flexibility ofmanagement.
So what may be good for societyis not necessarily good for

(11:02):
investors.

Steve Davenport (11:04):
Let's imagine for a moment that you're an
investor who is less reluctantabout bank stocks.
Would you be more willing toinvest in the big national banks
versus the regional banks?

Clem Miller (11:14):
Oh, absolutely the big national banks.
Big national banks, theirexposures are spread out
nationally and, in some cases,internationally, and so I think
those offer more diversifiedopportunities than, say,
regional banks that are limitedto particular geographic

(11:39):
exposures, that might haveweaker credit quality, weaker
economies or even, if they'restronger economies, much more
concentrated and reliant onparticular industries such as
the energy industry.

Steve Davenport (11:56):
Let's look at our mailbag.
Here's an interesting questionFrom an investment perspective.
What do you think is the bestbank stock?
Mine would.
We have two bank stocks, bothUS Bank Corp and Bank America,
and I would probably go with theBank of America because I

(12:17):
believe that one Moynihan hasbeen through a lot and I think
that as a leader he understandssending the right messages to
markets and also being diligentabout how he manages his cost in
the bank.
I also just like the overallcoverage and areas of exposure.

(12:41):
I'm not sure I want to be withthe investment banking side.
I'd rather have people whofocus.
If I want to own a bank, I wantto own a bank that functions
mainly as a bank Clem what'syours.

Clem Miller (12:54):
So mine is JP Morgan, or I should say JP
Morgan Chase, and whatever youthink about Jamie Dimon, he's
quite a public figure.
The fact is that this bank hasthe lowest short interest ratio

(13:16):
of any bank or any, I should say, large or medium sized bank in
the United States a listed bank,and that gives me some comfort.
And in fact I have held JPMorgan Chase at times, but I've
sold it and right now I have nobank exposure.

Steve Davenport (13:40):
That's great.
Thanks so much for yourinsights, clem, and thank you to
all the listeners for tuning into our podcast.
If you like our content, wewould greatly appreciate your
liking, subscribing and sharingit with your friends.
Again, thanks for being with us.