Bloomberg Article on 6 Largest Banks Making Nearly $1 Trillion in Profit Over the Last Decade

I hope you had a great Christmas!  Today I came across an interesting article on Bloomberg discussing the fact that the 6 big U.S. banks have combined to make nearly $1 trillion in profit over the last decade, despite being universally hated stemming from the last Financial Crisis, and dealing with a historically low interest rate environment.  This list includes: JPMorgan, Bank of America, Wells Fargo, Citigroup, Goldman Sachs, and Morgan Stanley.  These companies generate more income than just about any U.S. company except for some of the larger Tech companies such as Apple and Microsoft. This sets up an interesting question.  If these companies are printing money, why are the current valuations so cheap?


Where you judge an endpoint is incredibly important in assessing the success of an investment.  Currently banks are making a lot of money, benefiting from higher interest rates, and they are conservatively reserved to be able to deal with the inevitable credit losses that come from a recession, but the stocks trade at low valuations that you’d expect if they were actually losing money.  These banks are multitudes safer than they were prior to the Financial Crisis due to the regulatory and capital requirement changes that have occurred since then.  For example, $200B of that $1 trillion of net  income, has been kept to increase capital ratios for the banks.  As we saw in 2020, even in a massively severe recession, albeit a short one, the big banks remained solidly profitable and then had a simply spectacular year in 2021.  With all of these positives in place, the stocks are simply out of favor currently because we are in a bear market that shoots first and asks questions later.  This disconnect between fundamentals and stock price is what creates opportunities.  We  were sellers of bank stocks in 2021 when many of them had rallied dramatically, and we’ve been buyers as they have gotten way too cheap in 2022.  When I look at stock prices for Bank of America, Citigroup, and Ally Financial for instance, I see opportunities for 50-100% returns within 2-3 years without expecting a good economy in the short-term.  Creating an economic environment where these companies actually lose money is very difficult due to the strength of their business models, and their conservative loan loss reserves that are already in place.  Imagine a bank account with a $100,000 in it that you can buy for $85,000.  The account keeps growing by 10% or so a year, but the amount you can pay for it keeps declining because of fear that losses will occur for one reason or another.  When those losses don’t occur, at some point, you’ll see mean reversion, and the price of that account rocketing higher like a stretched rubber band.  That is what I expect to occur with banks given their ability to remain profitable even through a recession, and the current valuations at discounts to conservative estimates of liquidation values.


One negative for bank stocks is that they are subject to constantly changing capital ratio requirements and this year the Federal Reserve once again increased the amount of capital that some of the banks have to hold on their balance sheets.  This has caused most of them to temporarily pause their stock buyback programs for a few quarters, but I’d expect most to ramp up again in Q2 or Q3 of 2023, which should be a nice catalyst.  When stock trade as inexpensively relative to earnings and book value, stock buybacks are enormously accretive in combination with the already large dividend yields.  It’s amazing seeing the rich multiples still being paid for companies such as utilities or consumer staples stocks, where 25-30x earnings is not uncommon, yet these massive profit and dividend generating banks are trading at 4-10x earnings, despite just as consistent of earnings records.  Over time, I believe the stocks will rally strongly based on both earnings growth and I believe P/E multiples that the market assigns to the banks will likely go up as well.  We’ve seen that happen in other areas such as large cap tech where the P/E multiples of stocks such as Microsoft, Apple and AMD doubled, which combined with strong earnings, led to stellar stock performance.


If one only buys and sells stocks and doesn’t utilize the covered calls and cash-secured put, it can be very frustrating because you have businesses that are doing well, but are remaining deeply undervalued for too long of a time.  The covered calls and cash-secured puts have dramatically improved our ability to enhance the cash flow generated from these investments, while also instilling a disciplined process in buying and selling the stocks.  This doesn’t mean we are always getting in at the lows, or selling at the highs, but it does mean that we are only buying when we feel there is a strong margin of safety, and we are selling when we feel like the stocks are fairly valued.  Historically, this fundamental investing framework has generated great returns for value investors.  Ultimately our patience and discipline should be rewarded as mean reversion kicks in and the stock prices trade closer to the intrinsic value of the underlying businesses.  I’m very optimistic on the potential for substantial growth in our portfolios’ over the next 12-24 months.  Right now things are volatile as markets have a lot of tax loss selling after a terrible year for both stocks and bonds, but I think as earnings start coming out in a few weeks, we will see another good quarter for most of our large positions.  Here is a link to the article for those of you that are interested in reading it: