The 2023 banking crisis was set off by just a few banks; leading the charge was Silicon Valley Bank and Signature Financial. The collapse of these two tech-laden banks shocked the U.S. banking system and drew scrutiny from Federal regulators. Markets were jittery with the news, and the entire industry was under pressure. But was the worry about U.S. bank stocks warranted?
After the Great Financial Crisis of 2007-2008, regulators required more capital and buffers to ensure banks’ resilience in the face of credit events. As a result, the banking system is largely very safe with the amount of capital controls and stress tests. Hammering home the regulatory framework, on December 6, 2023, the CEOs of top U.S. banks testified before Congress on potential new capital requirements. And Basel III will phase in starting July 2025, at which time the largest U.S. banking institutions will need to adjust their capital further to be in compliance at the three-year mark. This will change the way the banks think about regulatory capital and extend more granular, rigorous requirements to the U.S. banks.
As U.S. financials dipped in 2023, value investors like us identified prime buying opportunities. But not every bank is built the same; there is no generic business model industrywide. Instead, diligent fundamental research is required, with stringent metrics at the core. For Polaris to consider an investment, the bank optimally must have:
We look at the whole spectrum of U.S. bank stocks, from the mutual conversion thrifts to the regionals to the super regional and the major nationals. Inevitably, bankers want to grow via merger or acquisition; our preference is organic growth via opening de novo branches or digital deposits. Yet, both can prove equally successful. Over the past five years, we witnessed a “mergers of equals” phase, as banks sought to create a step change in their respective geographic/product/service footprint. During the market turmoil of 2020, banks hunkered down to focus on their customer base, and inevitably, M&A activity slowed. However, bank deals are ramping up in late 2023, as there is visibility around the rate environment.
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