Does the bank rally stall? Reading Warren Buffet’s letter this past weekend, bank investors might wonder why Berkshire’s investment heads dumped so many banks near the bottom. After all, banks are not far behind airlines and wildcatters in line to benefit from re-opening. Berkshire gave up 20% outperformance in the process:

Large Financials (yellow line) rising since Autumn while FANG et al (blue line) sit:

But just as the rally in junk equities has stalled, large banks may also take a breather. Bank of America CFO Paul Donofrio gave some color Friday on why:

with respect to commercial balances, we said on our earnings call that we saw a stabilization during the last 2 months of 2020, particularly around middle market and business banking. But unfortunately, so far this year, and you can see this, by the way, in the ACH data from the industry, we’ve seen loan balance continue to decline somewhat. Large corporate loans, they continue to access the capital markets and bring loan balances down a little in middle market, where revolving utilization has continued lower as we’ve gone into this year.

Mr Donofrio goes on to tell us that:

  • Consumer demand not making up for lower commercial (spread revenue to fall in first quarter)
  • Rising 10yr yield is nice but little immediate effect.
  • Bank of America can’t acquire banks due to being at the 10% deposit limit.
  • Bank of America can’t buy large amounts of stock back because of ongoing capital restrictions supported by Lael “why isn’t there inflation?” Brainerd & Neel “QE trickle down” Kashkari.

I would also note, we might soon expect deposit competition if clients determine they can get more on their money with recently rising yields.

So, is there anything Donofrio is excited about? He does like the Bank’s progress on diversity and healthcare. Also, capital markets is steady.

So, while there is reason to be optimistic about banks in general, 1Q earnings is not supportive for the largecap banks in specific.

BAC looks like a slave to aggressive capital markets pricing in commercial and stimulus pay downs in consumer. Maybe the Berkshire bros were onto something after all. It’s another reminder:

We prefer differentiated banks that can charge shareholder-friendly rates… bigger players compete solely on price.