Mid Month: Banks with asset quality issues, consumer credit & student loans
also... Bank of Hawaii, Interest Rate Winners, the Held to maturity Awards
Good morning,
Brief notes:
This note is again coming out prior to scheduled mid-month because bank equities remain volatile and nobody wants stale analysis.
A reminder that mid month notes have a (fairly modest) paywall. All the money gets given away and paid subscribers are allowing us to soon reach our charitable giving goal. I will say thank you, though if you allocate very much capital in this sector (most of you appear to be bankers and investors) then so far feedback has been that folks are happy with the return they are getting on their subscription.
a) The boring catalyst A month back I wrote a note suggesting that bank shares needed boredom to begin rising. Like an offensive lineman or cornerback on a football team, banks do best when out of the spotlight. Estimates may trickle down on deposit costs and loan growth, but loan spreads are improving. With several banks (PNC, BAC, CFG, USB) recently suggesting no change to guidance so far in 2Q, boring is on the rise.
b) Bankers - if you are choking on the construction to perm handoff due to cap rates… Don’t forget to push C-PACE financing, at 100% of costs for most roofs, windows, HVAC etc. to bump permanent financing takeout dollars You likely know 1-2 PACE providers but I can connect you if not.
c) “Structural damage”
“I also think the differentiation between structurally damaged banks as a result of some of this recent turmoil and the push down of regulation, the people who'll ultimately win from this, there's not as much differentiation at share prices as there ought to be today.” - PNC CEO Demchak, June 2
Demchak is right, a yawning gap is developing among bank performances. He’s likely talking about banks with less capital and earnings power because they heavily bought mortgage-backed bonds, among other causes. These banks have to sit still for a while, while customers and employees reorient towards banks that can grow. The market still hasn’t quite come to terms with this, but it may after 2Q and 3Q. Points 3, 4 & 5 below deal with some possible winners and losers from this effect.
Now for the notes, which are below in order:
Asset quality issues
Student lending and consumer credit
Bank of Hawaii breakdown
Winning: Last month we looked at “interest-rate challenged” banks earning under 4% yields. Today we look at those earning 6.5%+
The “Held to Maturity Awards” - looking at the largest implied marks to equity at banks shuffling assets into HTM, starring Schwab and Republic First.
1. Which banks are showing early asset quality issues?
Today, almost no publicly-traded banks have material nonperforming assets. However most managements suggest asset quality will “normalize”, meaning return to 1-2% nonperformers, and show slightly negative trends.
So who breaks worst? Bank investors don’t have “channel checks” and “alternative data” to forecast revenues, like seeing how many people are entering Wal Mart based on cell phone signals. What we do have is almost as good - classified and criticized asset data as nonperforming asset predictors. That is screened below, sorted by Classified loans / total from 1Q, including change vs prior month.
You can see Citizens (CFG), Pathward (CASH), Old Second (OSBC) and Bankunited (BKU) among others make the list.
We don’t see Valley (VLY), Veritex (VBTX), Bank of Princeton (BPRN) or Metropolitan (MCB), among others of particular interest.