Last week we wrote to you about when to expect bear markets to end and we touched on the first day of big bank earnings. Well, since then we’ve gotten earnings reports from Citigroup, Bank of America, Wells Fargo, Morgan Stanley, Goldman Sachs, and Ally Financial. These companies have access to an enormous amount of financial data on both consumers and companies. The main takeaways thus far have been the following:
There are no signs of credit issues for consumers or companies. JP Morgan’s CEO Jamie Dimon actually went as far as to say that “corporate credit has never been this good in our lifetimes, like ever.” Consumers on average still have much higher amounts in their checking and savings accounts than they had prior to the pandemic, so they have saved some of that money. Spending has shifted from “things” to travel and experiences. The unemployment rate is 3.6% and wages are going up, albeit at a slower rate than inflation. These aren’t conditions for many to start defaulting on their loans, which is the big concern if we are in or going into a recession. While we are seeing some layoffs in Tech, the spread does not seem to be broad-based as there are still many job openings. This is nothing like what we saw in 2008 or 2020.
On a micro basis, the banks are performing exceptionally well in a challenging environment. As we’ve been writing about all year, they are benefitting hugely from higher rates, with net interest income (which is their biggest source of revenue) increasing by mid-teens or even up to 20% YoY. They will see a further benefit when the Fed likely raises rates by another 75 bps in a few weeks. Capital markets activity such as equity and debt issuance, and IPOs, were pretty much dead given the very volatile quarter. This happens from time to time, but despite that challenge and with conservative credit reserves, as a whole the group outperformed substantially. We’ve seen a nearly 20% move from Citigroup just since last Thursday, which really has propelled many of the others as well. Today, Ally Financial reported very strong results and I thought it would be helpful to point out a few aspects of the valuation and opportunity, as I think it is immense.
ALLY closed on Tuesday trading at $33.32. Book value per share and tangible book value per share are $37.28 and $32.16, respectively. The stock trades at 4x trailing twelve months earnings and about 4.5x forward earnings. The dividend yield is 3.6% and the company is buying back stock. ALLY is generating a return on tangible common equity in excess of 23%, as they are outperforming based on strong credit and used vehicle values. Conservatively, on a medium term basis, they should generate a ROTCE of between 16-18%.
So think of buying 100% of ALLY for $1MM, right around tangible book, as that is where the stock price is at. This year, you should get a more than 20% return, or say $200K of profit. Even if earnings never grow and you never take the company public again, you will have an earnings yield of 16-18%, or $160K-$180K each year. The best part is, ALLY will grow and they’ll do smart things like buying back stock at these cheap prices. We have a whole portfolio of these insanely cheap opportunities. This doesn’t mean they can’t sell off more in this bear market, but the odds of success with any reasonable time frame are very high in my opinion, which is why I’m adding with every chance that I can. I’m glad to say that others are taking the opportunity as well, as I think it is a no-brainer if you have the means. Below are a few comprehensive research reports if you wish to go a little more in depth. Thank you very much and please let me know if you need anything at all.