- The yield curve is hurting them on all fronts. Not only are they not making enough on loans -- especially given the risk -- but they are now beginning to pay more for those deposits, so they are being squeezed on both sides.
- The competition for loans is steep. They don't talk about it much, but when pressed, every bank admits that anyone with a deposit base wants to make a loan. You can't make that much money with that much competition.
- The benefits from deregulation and a more positive government, at least toward business, aren't playing out in any really helpful way.
- Their dividends, while going up, aren't enough of a support versus other times in the stock market.
- There is no one left to buy. These big banks are just too large to buy any other banks.
Now, against all of this negativity is a level of value that is extraordinary. You are still seeing extremely low double-digit or high single-digit multiples, despite the fact that there is excellent year-over-year loan growth. JPM and C are holdings of Action Alerts Plus.
But that growth will be slowing down soon -- or is already, if you listen to Wells Fargo -- because there is too much risk and not enough reward. Some types of loans, like commercial real estate loans for shopping centers, present too much risk according to Wells.
In fact, it is surprising that Wells Fargo's stock acted among the best, relatively, on Friday, given that the company bemoaned the growth in construction of all kinds, commercial real estate and housing, the latter held down from a decline in opportunities and an increase in labor and commodity costs.
So why bother to deal with this group?
First, the buybacks are mighty. When you have these companies stepping up big with billions of dollars -- Wells is talking about picking more than $14 billion in stock for the rest of this year and Citigroup will retire 10% of its stock this year -- you can't just yawn.
Second, we think that the 10-year treasury can only go down in yield now. How about back in February and March when it could only go up -- are we going to be any more right now than we were "right" then?
Third, the second half of the year has historically been a terrific time to buy bank stocks as, post CCAR, they are able to turn on the jets with their buybacks. Keep in mind that Citigroup has 3 billion shares outstanding in 2015. Now they only have 2.5 billion. That's extraordinary.
Fourth, there are still value owners out there and these represent tremendous value with lots of opportunity, if longer rates go higher and the Fed increases short rates, but these firms don't increase what they pay for your deposits.
Fifth, the fabulous JP Morgan CFO, Marianne Lake, said on the upbeat JPM call " We've yet to see the full effect of tax reform flow through into profitability and free cash flow" in the economy.
Finally, all of these banks have the ability to make money almost risk free every day and they are getting zero credit for it. They have multiple streams of solid revenue that should matter.
Now I know that when it comes to financials, investors only have eyes for Visa (V) at 30x next year's earnings, Mastercard (MC) at 32x next year's earnings and Action Alerts Plus holding Paypal (PYPL) at 37x next year's numbers. That's all well and good. But at a certain point, when that yield curve gets more hospitable, then I think we will look at these prices and think, now I remember why I paid $80 for Citi instead of $67, $119 for JP Morgan instead of $106, $66 for Wells instead of $55 and $163 for PNC instead of $138. It's not like they haven't been there before. They were there six months ago. They will, I believe, be there again with just a few ticks the right way on the 10-year.