The financial crisis was horrible for many. I definitely failed to realize how intertwined our financial companies were to the health of the economy. Given how many “experts” work for our regulators, it is very tough for me to even beleive that this kind of thing was possible. I know Wall Street is famous for creating bubbles, but I thought our central governments (on a global basis) would have been more in tune with what was happening.
I wanted to play a rebound in the banking sector. My thinking was to find some survivors and hold onto them until the financial markets stabilize. I wanted to be geographically diversified as each state has its own set of risks. Originally I was focusing on the upside and not the downside. This lead me to overpay for many of them.
The screening process started by typing in a few financial company metrics and ended up stumbling upon PlanMaestro over at Variant Perceptions (see blogroll). He has some excellent posts on financial company analysis here. All things considered, I would rather own a Canadian bank over the small regional banks in the States. Our banks have fared far better, but so have their share prices. During the height of the crisis, I put 15% of my portfolio into Canadian Western Bank (CWB on TSX). I knew they would survive, the question was would they have to do some major dilution to do so. Though it wasn’t the most undervalued company at the time, I thought the risk/reward proposition was in my favour.
I wanted to start with a quick screen:
- Some insider ownership
- NO insider selling
- NPA’s stable of declining for at least 2 quarters
- Good NIM, ability to earn their way out of trouble
- Stable or improving Texas Ratio
- Cheap on a price to book
- Stable deposits
- Not needing to dilute shareholders any further
- 30-90 days past due are dropping
This meant I was likely to find companies who:
- Took on TARP money
- Share prices may have risen substantially already
- Had headline risk as financial reform legislation was in progress
- Share prices would be volatile
Of course, there was so many banks I didn’t know were to start. If you follow PlanMaestro on twitter, he talks about a few that he owns (or at least owned at the time). I picked the first 5 he mentioned and started researching.
For anyone who has not invested in bank stocks, they take a huge amount of time to research. Their 10-k and 10-q are very lengthy compared to many other companies. Enter Bank Reg Data. They have a huge database to help you crunch the numbers without combing trough enough reports to bury yourself. Best of all, the trial is free.
Since starting to “invest” in banks stocks, I have learned many things:
- Their loan portfolio is a black box
- Macro really matters
- Sentiment really matters
- There is an extreme amount of time required to properly understand just one company
- Despite the problems in the industry, their executives get paid very well
I have decided to cut my losses and run. It turns out that my portfolio would be positive for the year without my US banks. I would also be outperforming my benchmark too.
Are there really cheap banks out there..Yes. Can I find them..Maybe. Will it be skill or luck…most likely luck. I don’t have an opinion on the sector as I don’t feel like I am well-informed enough to offer one. In order to manage 15% of my portfolio, I was spending over 50% of my time. There are going to be banks that double and triple, but if I can’t determine risk, I don’t feel comfortable. It is much easier for me to understand other companies and industries. There are other fish in the sea, and most of those fish didn’t need to take TARP money. Turns out I was speculating and not investing. Though I feel that normally (non-financial crisis world) I can understand a bank, the credit crunch threw too many unknowns in the picture. If capital needs to be injected, the common shareholder takes it on the chin.
Another thing that bugs me is that many bank executives still make a ton of money, despite the precipitous drop in their share prices.
You don’t have to make it back the same way you lost it.