The biggest U.S. banks have now reported 3rd quarter earnings and they have all exceeded expectations.  2016 started so horribly for the big banks.  Poor economic data globally diminished the prospects of rate hikes, oil’s plunge created worries about the need for increased reserve provisioning, and Brexit had investors worried of a systemic collapse.  I could go on and on about issues that were supposedly going to be huge problems for these franchises.  The reality is that the big banks have performed pretty darn well throughout the year.

They have all improved their financial metrics dramatically in terms of book value growth, dividend payouts, and stock buyback authorization.

The big banks that we are invested in have all cut costs dramatically, so that they can enhance profits even if interest rates don’t go up, although I certainly believe they will head higher sooner rather than later.  Many market pundits point to the fact that returns on equity are lower than they were before the Financial Crisis.  Of course they are given that these banks now have more than double the capital and double the liquidity, in addition to lower risk business models.

They are incredibly safe and durable companies with the potential to grow earnings dramatically over the next 3-5 years. 

We have now reached the point where just about all of the big banks are overly-capitalized and will be in a position to return 75-100% of earnings to shareholders each year.  This means that dividends will likely grow dramatically as will stock buybacks, which given the huge discounts to intrinsic value that these stocks trade at, are hugely accretive!


Business Perspective

The big banks really haven’t performed that well over the last two years from a stock perspective, but from a business perspective they are doing very well.  Currently they trade at huge discounts to intrinsic value, setting the stage for years of mid to high double-digit returns moving forward.  The process has taken longer than I expected and a lot of that has to do with interest rates staying lower for longer.  Market participants have really focused only on the negatives, and have given very little respect to all of the positives that are so incredibly apparent when we look at the financial statements.

I expect financials to be one of the few safe harbors, in a market where the risks are far greater than the rewards for most industries. 

I wouldn’t invest in 90% of the other stocks that I analyze right now, but I continue to add funds to increase exposure to these excellent companies trading at such attractive levels.

Below is a fantastic article that articulates the environment for financials.  The stocks that we own are actually even far cheaper than the metrics that the article provides for the industry as a whole.  I hope that you enjoy:


Those Unloved Banks Look Lovable to Me