Bank stocks

[brewer12345]

I know we all love our CDs, but how about some bank stocks? An awful lot of them are pretty beaten-down, and most pay attractive dividends. The big banks tend to pay a higher yield, but you give up growth opportunities and can never exactly be sure what is in their portfolios. The midsize and small banks usually have better growth opportunities and are easier to understand, but usually offer lower yield. Might not be the bottom quite yet, but I may be starting to nibble soon.

 

[wabmester]

I like banks that own credit card operations (like BofA), but I don't see how traditional banks are going to make money during a possibly long period of flat yield curves. What do you see as their upside?

 

[brewer12345]

Depends on their interest rate posture, hedging strategy, etc. It is quite possible for a bank to be very well duration matched (taking minimal interest rate risk) and still make nice money. Look around: can you borrow money on a HELOC , buy reasonably safe assets that are floating rate and make money? Nope. But a bank can borrow at institutional rates or less (deposits) and make a HELOC loan and make attractive returns, especially when they lever their equity capital 10 to 15X.

 

[wildcat]

How small are we talking Brew?  Seems like the small ones have M&A prices built in and the mids are just kind of in limbo.

I noticed Marty Whitman plunked down some $$ in NAL.  Seems like he has some Yale connections there but I don't see the value there.  

 

[brewer12345]

Up to the individual investor, I guess. Prretty much all size categories have taken a beating in the market lately. I personally tend towards the smal and midsize guys. I have positions in one bank with a market cap of ~25MM, one with a cap of ~100MM, and one with a cap of ~2.8 billion. The biggest of the three probably has the most impressive operating performance over time and the best risk management.

 

[wildcat]

Brew -

What performance measures do you feel are the most important?

 

[brewer12345]

Brew -

What performance measures do you feel are the most important?

1) Credit quality - NPA as % of assets, appropriate level depends on what kind of lending is done
2) Appropriate capitalization - Equity as % assets, depends on riskiness of assets
3) Reasonable provisioning for loan losses in the income statement (don't want this to be a cookie jar)
4) Good deposit growth and deposits to cover loans
5) disciplined asset growth: don't want to see huge balance sheet growth if the risk vs. reward isn't there
6) Conservative approach to risk management: don't do stupid things, like make Option ARM loans, play the carry trade, pile into junk bonds, do lots of subprime credit card lending right before a recession

For a smaller bank, I focus on deposit and loan growth and the development of a profitable franchise (since a sale is the end game most of the time). For a mid size or larger bank, I like to see efficient use of capital, a good dividend track record, and judicious repurchases of stock. In general, I avoid serial acquirers. I'd rather be on the selling side than the buying side.

 

[yakers]

One of my DRIPs is Keybank (KEY) out of Cleavland, one of the banks that actually did not fold or close durning the Depression. It pays a nice dividend and grows a bit and is a good takeover candidate for the big boys.
I am a buy & hold type obviously with DRIPs and I know there are better performing banks but this one has worked decently for me.