Investing in banks solely for M&A potential is a poor strategy. Acquirers are disciplined and avoid overpaying, meaning investors are often left holding mediocre franchises waiting for a small pop that may never come. Focus on organic growers or smart acquirers instead.
The most reliable indicator for identifying top-performing bank stocks over the long term is the rate of tangible book value (TBV) growth. A screen for banks that have compounded TBV the fastest will yield a list nearly identical to the best-performing bank stocks.
Private credit grew by taking on riskier loans that banks shed after Dodd-Frank, making the core banking system safer. However, banks now provide wholesale leverage to these private credit funds with minimal due diligence, creating a new, less transparent concentration of risk.
Months before its collapse, SVB's insolvency was calculable using its own Q3 2022 earnings release. A simple mark-to-market adjustment of its securities portfolio revealed a negative tangible equity of $4 billion, a clear red flag missed by the market.
While AI and fintech lower switching costs for retail customers, small and mid-cap banks retain their core clients—small to medium-sized businesses. These businesses depend on the sticky, lifeblood credit relationships with their local banks, making them less likely to switch for better deposit rates.
A market anomaly exists where large-cap banks trade at higher multiples (12x earnings) than smaller, faster-growing banks (8x earnings). This is driven by massive passive investment flows into large-cap indices and the perception that large banks are 'too big to fail.'
After a decade of underperformance, European banks are becoming attractive. Management teams are shifting away from empire-building and adopting a new focus on shareholder value, demonstrated by increasing ROEs, divesting non-core assets, and executing large share buybacks.
Financial advisors such as Ameriprise and Raymond James have compounded earnings at high rates (17% annually) for decades, yet trade at low P/E multiples (~11x). Their sticky, direct-to-customer relationships create a strong moat that the market underappreciates compared to asset managers.
The common advice to 'buy more cheaper' when a stock falls is a flawed strategy. It often leads to allocating more capital to your worst ideas and compounding mistakes. Instead of automatically adding to losers, the bar for re-investment should be exceptionally high.