Banks (part 2)
May 28, 2021
Yesterday, we covered expectations for large cap banks to increase buybacks after June stress test results (late June). The increases should be significant and positive for the group in the near-term, but we prefer smaller regional banks with an ability to give shareholders a return on capital, not just a return of capital. You might be surprised to learn the top performing banks over the last 10 years have all issued capital as they grew organically and took market share. Researching the best banks to own is no different than researching any other company. You want banks that can grow revenue, earnings and tangible book value. At the moment, you also want to own the banks that are already showing loan growth. These are all regional banks. Remember, loans are a bank’s assets, deposits are liabilities. The best regional banks are obsessed with customer service and empower their employees to make decisions. Large cap banks are obsessed with cost cutting, products and technology designed to reduce human interaction. The best regional banks invest in technology to facilitate human interaction. Pull up Net Promoter Scores for banks and you’ll find the most familiar names at the bottom. Those familiar large cap banks have underperformed the S&P 500 by ~50% over the last 10 years. You can play the return of capital game in the near-term, but you want to own the best regional banks through this cycle. Even with the recent rally, regional banks trade at an average ~1.5x Tangible Book Value (TBV) vs. ~1.9x in pre-pandemic 2019 and the long-term average of ~2x. The peak average multiple has been ~2.5x when fundamentals were arguably less compelling than they are today.