After a few days of respite we saw a rough day for banking preferreds – mostly red, but the red wasn’t as deep as we have seen in the past.
It is obviously too early to go ‘all in’ with the banking preferreds–but there should be no doubt that there is opportunity coming–unfortunately we don’t know when that opportunity will finally present itself.
I continue to watch those bankers I own for any new news–i.e. uninsured deposit level etc. so I don’t have to start my hunt later ‘from scratch’.
I see community bankers with current yields from 7.5% all the way up to almost 10% and most of these have presented solid earnings recently–but this story is not static and you see from a day like today that it looks like there is an ‘all clear’, but these things always take longer to play out than one would ever predict. Patience!
9 thoughts on “A Rough Day for Banks and Insurance Preferreds”
…shouldn’t we anticipate some calls on more than a few of these Fixed to Floating preferred bank issues? Yield is a function of dividends and…a bump on your basis. Buying now…could be handsomely rewarded for taking a
Regional Banks don’t make fixed loans…btw. (At least none that I’ve
done business with over that last decade.)
Mr. bob, you are correct as to majority loans are variable. I am not smart enough to understand the impact of interest rate caps which the banks also required on most loans. Not sure the banks ever expected such a dramatic increase in interest rates. So not only is there a credit risk, there may also be a duration risk if their capital cost exceeds the interest rate caps. I hope to dive into this issue. Would appreciate any post from others that have an understanding of this.
I didn’t mean to sound flippant about bank lending practices but…as a
general rule, most “regional” banks have access to a pretty significant
“plug” of relatively low cost capital….largely by virtue of a fairly broad
base of steady customer deposits….i.e., paychecks, social security and
pension payments and any one of a number of typical distributions
that ebb and flow though the local banking systems. And sure, some
to those customers might have deposits in excess of the FDIC limit
but, I’m guessing….it’s not as large a number as some would assume.
Investors don’t typically buy CD’s or leave that much long term cash
…in a bank.
My point is/was…there are a number of bank preferred’s currently
selling in the high teens, low twenties that will “probably” be called
as interest rates start to fade rather than get stuck in an expensive
Libor + float. In the interim, these same issues are paying 7.5 – 8%
right now…while we wait to see what happens.
Tim . This, federal reserve , drops rates , the Banks made loans 4-6 % and now they raise the rates and the are paying 3-5% to depositors. Margin is not coving their expenses…. Georges
The closed end Pfd Fund “PFO” is looking good. Distribution 9% and trading at a 9% discount!
They cut their monthly payout by roughly 1/3 in the past year.
In my humble opinion, when you can get 9% from GS PRJ, community bank preferred shares need a rate much much higher than 10% for the risk…
Walden—you might be right–and we might see that yet. How long will GS-J be around though?
It just depends what you want and your intentions. The GS issue may be a bit safer and will near tern crank out solid yield. But its totally in bed with Libor (SOFR) for its yield, and longer term it could be a capital loser being its upside isnt much past call now. Im not criticizing it as I own a couple like it so that isnt my focus. I hate bank preferreds generally but I have started some entry positions in ones at over 9% percent and longer term if they survive will pay off nicely. But staying prudent and looking at other sectors too.