Thursday, 18 February 2010 23:00

BoomBust Bank Research Should Really Start to Look Interesting Featured

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Now that the Fed has sent a clear signal that they are withdrawing some of the hyper-stimulus measures, combined with the fact that the monopolistic trading profits of the big banks are returning to mean, the trash on bank balance sheets should start coming to fore. Higher rates will compress net interest margins, and if you have been following my research the NIM of many banks were actually rather anemic despite zero interest rate policy. Now that banks are going to have to actually earn money by lending in lieu of a free lunch from the government, you should start seeing some very big hits to earnings - accounting and otherwise.

I will be revisiting this in detail after I finish the European Crisis Series. Practically all of the big and regional banks have purposefully contracted their loan portfolios and lending activities to curtail risk. This means that they will be making less interest income. Normalized (as in less) trading income, less interest income, the Fed looking (we will see if this actually happens) to stop putting an artificial bid under the MBS market, housing still in a downturn as foreclosures/distress sales are still ramping, much tighter regulation, a bunch of trash on the balance sheets (remember, the cause of this malaise has never changed) and an increase in price of several hundred percent for many banks is an elixir for a short seller's ambrosia.

It may have taken 10 months or so, but believe it or not it appears as if fundamentals may be returning to the investment game. If so, be aware that the banks are quite overvalued. Keep in mind that the comp valuation of many banks have increased because the peer group has risen so much and so broadly. That doesn't negate the fact that the underlying balance sheet issues are still there and regulatory and macro headwinds are quite stiff. I am looking for the peer group valuations to return to mean, which means a sharp dip in many of the banks that I have covered. I will attempt to review relevant scenarios in detail for subscribers. 

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Read 6383 times Last modified on Friday, 19 February 2010 05:32
Reggie Middleton

Resident Contrarian Badass at BoomBustBlog (you can call me Editor-in-Chief)...

Disruptor-in-Chief at Veritaseum.com, where we're ushering the P2P Economy.

 

www.boombustblog.com