Interest rates continue to march higher with the 10 year at 3.63% this morning and the 2 year at 4.27%. Yesterday, and for the last week or two, we have had some very calm equity markets irrespective of the move higher in interest rates–this won’t last forever–we will reach the point soon when common equities AND preferreds and baby bonds will react in a negative way. We had the Silicon Valley Bank crisis in early March and income issues fell very hard. Since mid March preferreds and baby bonds have climbed 4% from a panic selloff–more than ½ of losses have been recouped–how long will this bounce continue? My guess is not much longer.
Yesterday, as I mentioned I added a very small amount of 3 regional/community banks preferreds. I added to Merchants Bancorp, Bridgewater Bancorp and Heartland Financial. These were all small positions and remain small, but their 7-8% current yields help to balance the 5% CDs and treasuries. All of these report earnings next week so I will re-evaluate after we see the latest data. My laundry list of holdings is here.
We had earnings yesterday from bankers First Horizon (FHN), Fulton Financial (FULT) and Western Alliance (WAL) all of which have preferreds outstanding. As noted above next week Customers Bancorp (CUBI), Merchants Bancorp (MBIN), Bridgewater Bancorp (BWB) and Heartland Financial (HTLF) all report earnings next week. A few items to note is that most of these banks do not have huge security portfolios thus the discussion of losses on holdings is minimal. Also I note that we are seeing increased losses on commercial loans and as you might expect banks have had to pay a large FDIC assessment.
Also of interest Lincoln Financial (LNC) and Jackson Financial (JXN) both report in early May.
Big banks US Bancorp (USB) and Morgan Stanley (MS) reported this morning and earnings were good (as expected). USB did show a jump in problem commercial real estate and I suspect we will see major issues in this segment when (if) we see a true recession.
Today I won’t be making any new purchases–not feeling the motivation today–plenty of dry powder resting in money market at decent rates.
9 thoughts on “Lots of Banks Reporting”
Am I missing something?
FRC is trading at 14.00 a share, and the Series I preferreds are trading at 6….
This is a time where I am buying one July 2024 put on the common for a price that is the strike minus the cost of the put that exceeds the per share of the cost of 100 shares of the preferred.
e.g. like the July 2024 20.00 strike that you can buy for just under $12.00 per contract.
So either I am going to end up flat or slightly ahead because the bank goes bust and the puts pay off, or the bank survives and the Preferreds soar in value, way more than the cost of the puts.
Am I missing anything?
This is more a lottery ticket, than a due diligence strategy..
What if FRC limps along into the second half of 2024 and then goes bankrupt? The put could expire worthless and you could still lose your investment in the preferred shares.
yes, that is the risk, but it seems somewhat remote that they could survive for over a year without going bust with FDIC takeover or getting bought.
$1,200 is expense insurance of $600 of preferred.
Just buy 1,800 worth of FRCpM
The call is….. SVB will lead to more gov regulations on all banks. Add that to CRE problems from low vacancies and lower lows look to be inevitable. And restrict upsides. Is the take, today. Also Barron’s sited asset book problems with lnc and jnx amongst others.
Personally I think it’s too easy to go short here. Opportunities abound. International ideas not even being discussed.
Are preferred/bond holders just more cautious than equity holders? I look at announcements by WAL about deposits, and see that the common rebounds more strongly than the preferred. While the equity is last in the food chain, perhaps they are the risk takers? The equity gains $500 million in market cap, which almost twice as large as the size of the preferred when issued.
It wasn’t long ago that you were seeing comments questioning whether preferreds were investable. So I’d say yes, it can be nervous bunch…but there can be opportunity in that.
Not the most complete list, but the WSJ has a handy Y2Y bank earnings tracker, 2Q23 vs 2Q22, a short list of the ” in the headlines” banks. (Subscription may be needed if you are out of the free articles zone. )
Track How U.S. Banks Are Faring in First-Quarter Earnings. With industry under stress it hasn’t seen in years, The Wall Street Journal gives you a glimpse into the vault
IMHO, should be a good time for the day traders here. Looks to me like Wall Street is looking for a relief rally in the regionals and the buy the dip crowd could be coming out in force. With the drop in interest rates, the value of all those underwater 1 and 2% bonds and IO mortgages is improving.
On the other hand, now that the banking crisis is all better, the Fed can go back to hiking. Bloomberg Pundit this AM is playing a May-June daily double and even talking of a trifecta. Yikes. Just my opinion.
Tim, a few III’s had been following WAFD one of the first regional banks to report last week. If people didn’t catch it on your daily news of interest here it is again.