Many bank managements are surprisingly upbeat on the direction of credit. Given ample capital levels, forward thinking managements are beginning to repurchase deeply discounted shares.
Managing a bank is tough, because CEO’s have to be mindful of customers, employees, shareholders, regulators, and sometimes even politicians. JP Morgan CEO Jamie Dimon has stayed CEO for so long because he manages all these in balance, even giving a nod to the Democrat postal banking idea by offering to set up ATMs at post offices.
As of August 2020, however, many management teams are seeking the warm cocoon of regulators first, everyone else later. It seems right, but think in terms of Big 10 college football vs. SEC / ACC – sometimes you have to look forward to take calculated risks. Specifically, we want to own Alabama and LSU – banks taking advantage of cheap shares – and sell Ohio State – banks sitting on their hands waiting to buy more expensive stock later.
We see bank shares underperforming the broader markets while most bank management teams are quietly very optimistic. Directors prove this by having consistently purchasing bank shares since March, while more popular technology companies have been the source of a wave of selling (last week was a continuation of this trend, from CNBC.com below)
But while directors buy their own shares and give upbeat reports on credit (vs expectations), only a handful of banks have been buying shares back, despite massive accretion from purchasing at 7-9x 2022 earnings and less than tangible book. They would rather make loans at 4%, and avoid explaining their decisions to regulators.
But a few management teams have the guts to act on what they are seeing. Community banks in Texas, Georgia, and Wisconsin are a few we have found from recent months.
Let Apple buy back stock at a 3% earnings yield. Several small, forgotten banks are getting a 12% earnings yield + tangible book accretion buying back stock from forced and fatigued sellers. Many will be raising a trophy on 2021 earnings…
