Greedy When Others Are Fearful

It has long paid off to be greedy when others are fearful and these days the banking crisis has frightened many folks. From Silicon Valley Bank to Credit Suisse to First Republic, there have been plenty of scary headlines. Of course, interest rates have fallen, likely alleviating pressure on bank balance sheets, and the Federal Reserve would appear to be near the end of its tightening cycle. In our latest Special Report, Banking on Value Stocks, we put the recent happenings into perspective and offer the reminder that time in the market trumps market timing.

The Prudent SpeculatorBanking on Value Stocks

MARKET TURBULENCE ISN’T UNUSUAL

The Prudent Speculator began in March 1977 as a fortnightly epistle, and we’ve been sharing our thoughts with readers ever since. Over the ensuing 46 years and counting, we’ve navigated through a variety of scary headlines, with each frightening event overcome in the fullness of time, so much so that long-term returns on equities have been terrific, despite numerous downturns, selloffs, corrections and Bear Markets along the way.

Every disconcerting decline is unique, but they always seem to bring out a slew of doom-and-gloom prognosticators predicting that an even greater plunge is imminent. Of course, nobody has a crystal ball as the future is unknowable, but fear certainly attracts plenty of eyeballs, and many investors feel compelled to act. Given that I think the key to success in stocks is not to get scared out of them, I like the advice offered by Vanguard founder Jack Bogle in August 2011 when S&P downgraded the U.S. credit rating, “Don’t just do something. Stand there!”

Or better still, I think it a fine time to consider adding to or picking up shares of some of America’s finest and largest financial institutions.

DEPOSITORS RUNNING TO BIG BANKS

The Federal Reserve reported on March 24 that bank deposits fell by $98.4 billion to $17.5 trillion in the week ended March 15. Deposits at small banks retreated by $120 billion, but those for the 25 largest firms rose almost $67 billion.

No doubt, there will be winners and losers in the current crisis in the banking industry and we note that central bankers have acted with alacrity to insure uninsured deposits at Silicon Valley & Signature Bank, provide additional lending facilities to all banks and “encourage” deposits into First Republic from 11 big U.S. banks.

I believe that there is opportunity in some of those 11 banks that were tapped by Uncle Sam as their share prices have also taken it on the chin.

PNC Financial (PNC) is one such name as shares have fallen 38% since the beginning of 2022 and nearly a quarter just over the past month. Under long-time CEO Bill Demchak’s guidance (he joined the firm as CFO in 2002), the bank’s management has seemingly managed risks well, allowing it to go on offense at times when others have tended to retreat.

A span of years spent de-risking leading up to the Great Financial financial crisis left it in solid position to take on distressed National City Bank at the end of 2008. PNC’s purchase of RBC’s U.S. retail branches in 2011 further expanded its reach and mirrors its latest acquisition of BBVA’s U.S. retail operation in 2021.

Back in January Mr. Demchak said, “Our progress within the BBVA influence markets continues to exceed our expectations and we see powerful growth opportunities across our lines of business in these new markets. We continue to generate new customer relationships and we’ve been thrilled with the quality of bankers we’ve been able to hire.”

One of just a handful of regionals that joined to infuse $30 billion of deposits into First Republic, I think PNC has managed its investment portfolio well with plenty of shorter-term debt instruments on the balance sheet and a relatively small unrealized loss on its Held-to-Maturity (HTM) securities.

Near-term earnings projections are potentially under pressure, but PNC shares trade for just 8.5 times the 2023 consensus EPS estimate and offer a 4.8% dividend yield.

For those that would rather stay away from the regional banks, it should be of no surprise that I also favor financial giants JPMorgan Chase
JPM
and Bank of America
BAC
.

Well regarded for its oft-cited fortress balance sheet, JPM CEO Jamie Dimon has been in a guarded stance, citing “Storm Clouds” on the horizon for much of the past 12 months.

Mr. Dimon clarified his comments in January, saying, “I shouldn’t have ever used the word ‘hurricane.’ What I said was there were storm clouds which may mitigate. People said they didn’t think it was a big deal, and I said no, those storm clouds could be a hurricane. And so, I’m saying this stuff, I’m talking about…it could be nothing [or] it could be bad, and I think we should understand, I’m not predicting one or the other.”

Of course, the latest banking turmoil vindicates those remarks. But the CEO went on to say, “So far, we’re still in the hiring mode. We have a lot of growth plans. You know, I tend not to stop growing because you have a recession. Even in a recession, we’re opening in new countries we’re talking about. And we think those things are very good for shareholders over the long run.”

Even as shares have held up better than its major peers of late, it is remarkable that JPM trades for a single-digit P/E ratio and yields 3.2%.

On the other hand, BAC shares have been walloped, falling in line with the KBW Bank Index despite its status as a Too Big to Fail, Global Systemically Important Bank. Of course, Bank of America’s unrealized losses on Held-to-Maturity assets are sizable, but I expect it is very unlikely these will ever be realized given the company’s diverse base of core deposits many consider to be very sticky. Moreover, B of A boasts a much smaller percentage of uninsured deposits relative to the total. As of the end of 2022, uninsured deposits represented just 39% of total deposits.

Like JPMorgan, Bank of America also sports multiple levers available to generate fee revenue from its prominent consumer franchise. BAC trades for just 8 times the 2023 EPS estimate with a 3.3% dividend yield.