It’s time to cut the banker’s salary once and for all
Once upon a time there was a bank run by Wookiees
Didn’t hedged, now it’s brokers
Non-objective tank base, the irony is that
Time to get around the hat
What a week. This time it’s different, but it’s like deja vu again. Big moves in the markets. Discount windows. I took up poetry to stay sane. My funds are bloodied. Yours too, I believe.
The temptation to “do something” is enormous. Sell. No, buy! Put the cash in your suitcase. British readers also digest budget unusually stuffed pieces. More on this next week.
The best approach is to keep the investor’s hat on. Associate each event with asset price changes. Where are the scores now? What’s with the discount? Weigh the risk and reward. Remain calm and analyze the numbers.
Let’s start with Silicon Valley Bank. Personally, I wouldn’t give a cent for this – preferring lenders with names like Morgan or the Rothschilds, or banks that sound like countries. West coast pile beginner loving sitting in bean bags? Never.
Like many including European regulatorsI am surprised by the generosity of the US aid, not to mention its irony. They were destroyers. They boasted about breaking things. One small crack, however, and they ran towards the mummy. In the UK too.
However, for investors, the SVB and subsequent spasms are, in my opinion, beneficial. I wrote last week that politicians will end up “hiding it” when it comes to raising rates is too painful. But how to do it without losing face? The European Central Bank climbed 50 basis points on Thursday but abandoned its hawkish stance. Others may follow.
The markets agree. Briefly on Monday, futures were cut by the Federal Reserve by 25 basis points this year. Just a few weeks ago, another increase was expected this month. No wonder bonds flutter like geese in the wind. The 10-year Treasury yield has risen more than 100 basis points this week alone.
Yields are now lower across the board, which will comfort stockholders when the dust settles (wrong, but there it is). And since inflation is still around, real interest rates may have already peaked. This helps traditional bonds and their inflation-protected counterparts.
Meanwhile, aid, free money and lifelines for companies like Credit Suisse and First Republic will support the bank’s shares in the short term. But lower net interest margins end up hurting the bank’s bottom line. However, this sector is cheap, 1.1 times the book value.
And there are quality banks with price-to-earnings ratios barely in the double digits. The counterargument is that there will no doubt be stricter rules and capital requirements. May be. No doubt Wall Street was quick to invest $30 billion in First Republic to show it could take care of itself.
As an investor, I would welcome a little more intervention, if not from regulators. To see why, join me ten years ago as I sat opposite Congressman Barney Frank at the White House Correspondents’ Dinner. We traded war stories about the financial crisis, and the senior banker showed us photos of his new yacht (hint: it’s probably rigged and ready to sail).
If you had told Barney then what the jars would look like now, he would have laughed. His Dodd-Frank Wall Street Reform and Consumer Protection Act recently overhauled everything from consumer protection to derivatives trading. Change was coming. Yet banks today are more or less the same.
We knew there would be more crises. But at least everyone hoped that section 951 of the law would make a difference. This gave shareholders “the right to vote on payment”. We thought that if the banks were basically guaranteed by the state, then, undoubtedly, over time, excessive wages would be reduced.
This didn’t happen either. If you take the top 10 US lenders, for example, average employee wages as a percentage of revenue since the financial crisis are four percentage points higher than in the boom years that preceded it, according to data from CapitalIQ.
Shameless. But it does explain why the banks went out of their way to make us forget we bailed them out. However, bankers are still rewarded as if they were owners or entrepreneurs taking personal risks.
Let’s hope the $300 billion Fed bailout this time around reminds everyone what the hell this is all about. Particularly the shareholders, who have watched the employees of many banks line their pockets suffering from the lower cost of return on equity.
But I look at it like a glass half full. Profit multiples for banks are already tempting, as I showed above. They would be even more attractive if bankers were paid salaries and bonuses in line with other professions such as accounting and law.
By my calculations—again for the top 10 in the U.S.—a reduction in bankers’ salaries by just a third would increase net income and return on equity by 10 and 4 percentage points, respectively. I think for an industry where mid-office employees earn six-figure packages, the halving is more of a ballpark.
Not only does this offer upside potential for the stock, but it will help eliminate moral hazard. Lenders know they’re getting paid like rock stars in good times, while idiot taxpayers pay when the stage lights go off and everyone’s hair goes up in flames.
All of this means that I’m looking at banking sector ETFs very seriously at the moment. I wrote about them briefly in January when stocks were much higher than they are now. Does anyone have any suggestions for funds to share? If not, then a poem?
The author is a former portfolio manager. Email:email@example.com; Twitter:@stuartkirk__
This article has been amended to correct the increase in ECB interest rates.