Over the last two weeks I have updated my reduced earnings estimates and price targets for Bank of America (BAC) , JPMorgan Chase (JPM) , Wells Fargo (WFC) , PNC Financial (PNC) , Goldman Sachs (GS) and Citigroup (C) , and I have tried to explain why I have been aggressively buying the recent weakness in bank stocks. (Note: Back in January 2020, I reduced my large holdings to medium-sized in response to the large percentage moves higher toward my 12-month price targets.):
There are several reasons for my view on the banks:
- The fundamental outlook for banks is excellent.
- The banking industry's excess capital position, the power of its deposit base and absolute earnings power are underappreciated.
- In 1Q2020 and 2Q2020 the banking industry will have been successfully stress tested!
- 2020 will likely represent a trough in bank industry profits - to be followed by consistent increases over the next 3-5 years.
- Will 2021 mark a renaissance for investment banking?
- Banks represent my largest industry exposure.
I have raised back my positions to large-sized.
Here Is My Investment Rationale:
It is extremely important to recognize that 2020 will mark an earnings recession for the banking industry and not a balance sheet recession. Equally significant is, despite the expected earnings recession, Bank of America, Citigroup and JP Morgan will increase their book value in 2020 over 2019.
Coming out of 2020, and after the large money center banks demonstrate their earnings resiliency this year, I expect a valuation reset higher for the banking group.
In terms of the profound balance sheet difference since 2009 - the large money center banks have added over $1 trillion of new capital, cash is more than $2 trillion higher and deposits have grown by more than $3 trillion. Equally important, the cushion or gap between current capital levels compared to the present unfunded corporate obligations (and allowances) has never been wider and represent a far different picture than 11 years ago when The Great Decession almost bankrupted the global financial system.
I write proudly but humbly that I have some Street cred on the subject of banks and financials.
Back in the early 1970s I was a "Nader Raider" and I co-authored the book Citibank with Ralph Nader and The Center for the Study of Responsive Law. The book was well generally received and was used as a banking textbook in some well known and prestigious colleges.
At the time, innovative banker Walter Wriston ran Citibank (as it was then called). He "thought so much of the book" that he responded with his own book, Citibank, Nader and The Facts.
Several years later I went to work for "The Chief", Larry Lasser and Marty at Putnam Management where I was a research analyst following banks, GSEs and other financials. Institutional Investor magazine named me the top sell-side bank analyst for that 1970-80 decade.
I have continued to monitor and research banks since that time.
A 2021 Renaissance in Investment Banking?
While M&A is now (understandably) dormant, I want to start by mentioning that the chaos in equities and credit coupled with the uncertainties associated with the slope of the business cycle suggest to me that there may be a renaissance in investment banking and mergers and acquisition activity next year -- as we move away from the economic indigestion created by Covid-19.
This is a deeply non-consensus view - most think the opposite.
However, workouts could be growing exponentially, as the credit hit takes a toll on marginal actors, and takeovers may as well grow more rapidly as companies with financial and human capital may, in a slower growth environment (characterized by weak organic opportunities), be more acquisitive (especially with stock prices proving very attractive and deals being substantially accretive).
Companies like Morgan Stanley and Goldman Sachs may be ideally situated as beneficiaries of these possible recoveries and an upward trend. and even Renaissance in investment banking.
First-Quarter EPS Results
A preliminary look at WFC and JPM EPS releases Tuesday morning brought no surprises relative to expectations.
The industry is conservatively adding to loan loss provisions and the other main profit determinants were in line to better than expected.
My expectation is that as we enter the up cycle for banking industry profits we will likely get a multiple reset (higher) for the space.
This commentary is an excerpt from Doug Kass's Daily Diary on April 14. Kass writes his Daily Diary every trading day on Real Money Pro. Click here to learn about this dynamic market information service for active traders and to receive Doug Kass's Daily Diary and columns from Paul Price, Bret Jensen and others.