Which banks to own now?
The banks that haven't already gone to zero could be the ones to own today
Central bankers underestimated inflation
Policymakers at the highest levels of decision making are human beings who share the same human emotions as the rest of us. Overcome with the fear of hyperinflation policymakers might have overreacted during the interest rate hiking cycle.
Key takeaway: The US Fed and the European Central Bank raised rates +900% and +700% respectively in a very short period of time
| Interest rates | Current | 1 year ago | Performance |
|---|---|---|---|
| US Fed Funds | 5% | 0.5% | +900% |
| ECB Rate | 3% | -0.5% | +700% |
Investment banks negatively affected (while retail banks hold the line)
- March 17,2023: US investment bank Silicon Valley Bank (SVB) filed for bankruptcy. Its share price was $597.16 one year ago - today the share price is $0.4 cents!
A bit about Silicon Valley Bank (SVB): SVB was not a traditional bank; it was an investment bank that had a much different risk profile than a retail bank. It engaged in financing higher risk venture capital companies, and during the period of ultra low interest rates SVB was able to enjoy the profits of being an investment bank. SVB was not a small bank, but nevertheless the bank was allowed to fail. It was not considered systematically important since its customer base was mostly concentrated among a few ultra wealthy people.
- March 18, 2023: Credit Suisse was given a $54 billion bail out from the Swiss central bank. The share price has lost -89.26% during the last 52 weeks of which -71.94% that was lost was since the start of 2023!
Credit Suisse was a global investment bank with a small retail bank footprint. The bank operated in a very niche market servicing high net worth individuals, investment banking underwriting, private banking. Like SVB, Credit Suisse was more sensitive to changes in interest rate moves. Although a 167 year old bank, it had problems during the past couple of years which were for the most part widely known across the industry. The collapse of Credit Suisse was therefore not such a big surprise. Many in the industry thought it was only a matter of time; the sharp hike in interest rates just happened to speed up what was bound to happen sooner or later.
Remember! Deutsche Bank is not Credit Suisse
- March 23, 2023: Deutsche Bank’s share price loses -6.13% during the US trading session, raising concerns within the EU banking world that DB might be in trouble.
Deutsche Bank - Key points:
- Deutsche Bank AG is the largest bank in Germany & one of the largest financial institutions worldwide.
- DB has a Market capitalization of $19.944 billion which is 8x larger than Credit Suisse
| Bank | Market Cap | P/E ttm | EPS ttm | Net Income(a) |
|---|---|---|---|---|
| JP Morgan Chase & Company | $379,339,584,000.00 | 10.64 | 12.08 | $37,676,000,000 |
| Wells Fargo & Company | $140,432,128,000.00 | 10.44 | 3.59 | $13,182,000,000 |
| Bank of America Corp | $225,067,968,000.00 | 8.93 | 3.19 | $27,528,000,000 |
| Citigroup Inc | $87,894,656,000.00 | 6.47 | 6.92 | $14,845,000,000 |
| Deutsche Bank Ag | $19,944,358,000 | 5.18 | 1.89 | 5,710,510,000 |
| Credit Suisse Group ADR | $2,655,521,000 | 0 | -0.67 | -7,642,340,000 |
NOTE: As of March 29, 2023 Deutsche Bank is solvent with over $5.7 billion in net income and earning $1.89 per share.
Let’s compare: The table below shows the two investment banks losing almost all of their value, while retail banks Deutsche Bank, Wells Fargo, Bank of America, Citi and JP Morgan managed to avoid such huge share price losses.
| Bank Name | Last | YTD %Chg |
|---|---|---|
| SVB Financial Group | 0.4 | -199.00% |
| Credit Suisse Group ADR | 0.8531 | -71.94% |
| Deutsche Bank Ag | 9.65 | -16.23% |
| Wells Fargo & Company | 37.18 | -9.95% |
| Bank of America Corp | 28.12 | -15.10% |
| Citigroup Inc | 45.22 | -0.02% |
| JP Morgan Chase & Company | 128.88 | -3.89% |
When a bank is in trouble the market takes it to zero fast. So what can we take from this?
- The fact that Deutsche bank is still trading is a very good sign. SVB and Credit Suisse share prices ran into the ground at a very fast rate when news spread that they were in trouble
- Deutsche Bank ADRs (American Depositary Receipt) can be bought for under $10 per share. Looking across the spectrum of a few very important systematic banks, Deutsche Bank shares, which are currently trading on US exchanges at below $10, could be an interesting proposition for traders and investors.
Question to consider: How much longer could the share price remain below $10?
Capitalise on volatility in share markets
Take a position on moving share prices. Never miss an opportunity.
What do analysts think about DB?
Analyst ratings as published on the Wall Street Journal (WSJ):
Current share price: $9.65 (28/3/2023)
- 9 analystS have buy recommendations
- Average price target is $15.25
- Highest target $20.56
- Lowest target $11.36
Too big to fail?
What’s the next chapter for one of Europe's systemically important banks? Is the DB share price undervalued, correctly priced or overvalued? Check out the chart below:
Express your view with Skilling’s Deutsche Bank CFD product today!
Extra Education:
- When interest rates increase, so does the cost of money
- Banks borrow money at a low rate then they lend it out at a higher rate for a profit. Not all banks can borrow at the same rate. The largest global banks typically can borrow at much lower rates than say a small regional bank.
- Banks need to take risk in order to make a profit
- Banks are in business for profit; they are not charities. Generally, bigger banks have access to a lower cost of borrowing, thus big banks enjoy higher interest income profits, without having to take on higher risk. Generally, since smaller banks have to pay a higher cost for borrowing, smaller banks tend to allocate more capital towards higher risk business ventures in order to increase profit margins.
- Small banks can make outsized profits on high risk business ventures
- Smaller banks tend to take on more risk exposure. During periods of low interest rates, smaller banks can earn supersized profits as risk assets typically perform well during periods of “cheap” money.
- When the music stops the party is over
- Higher interest rates are crushing high risk venture capital investment banks. The days of cheap and easy money (i.e. low interest rates fueling economic growth) are over, but that does not mean the end of economic growth. Another day, another dollar as they say.
Not investment advice. Past performance does not guarantee or predict future performance.
