Radical changes in the regulatory landscape in addition to enormously expensive costs pertaining to dealing with problem mortgages, have elevated banks’ cost structures over the last several years. Revenues have been flat due to lackluster economic growth particularly in the banks’ bread and butter areas of real estate and commercial lending. To confront these issues many of the large banks have implemented substantial cost savings efforts which have included large layoffs. It is our contention at TTCM that the worst of the mortgage problems are well over by now, and as lawsuits get resolved and assets get sold, the elevated cost issues will decline. From a regulatory standpoint the banks have had to shudder profitable businesses such as overdraft fees and proprietary trading, and change other businesses to compensate for the loss of revenue.
Moving forward we expect to see housing get better, mortgage related costs come down, revenue to grow as the economy picks up steam, and interest rates to go up improving the net interest margins. When these things occur the benefits of the other cost savings initiatives such as reducing headcount should shine through improving the profitability of the banks. Loans being made now are of very high credit quality and have solid yield spreads and the banks still have huge reserves in place to deal with the ongoing mortgage issues. For the large bank stocks trading at substantial discounts to intrinsic value the likely catalyst will be share buybacks which will be extremely accretive to tangible book value at current levels.