Investors Beware, The 4 'Too Big To Fail' Banks Are Not Great Long-Term Investments

Mar. 13, 2018 8:46 AM ETBAC, C, JPM, WFC16 Comments

3.68K Followers

Summary

FDIC data suggest that our nation’s ‘too big to fail’ money center banks are ‘too risky to own’ now.
The Trump administration wants to ease banking regulations but what happened to the pledge to end ‘too big to fail’?
I will show reasons why the four biggest banks are also ‘too big to regulate’.

Bank of America (BAC), Citigroup (C), JP Morgan Chase (JPM) and Wells Fargo control (WFC) control 42% of the total assets in the banking system making them impossible to regulate.

Wall Street likes bank stocks due to rising interest rates by the Federal Reserve. However, the FDIC cautions that some banks have been reaching for yield in a low interest rate environment. The Federal Deposit Insurance Corporation in their Quarterly Banking Profile for the fourth quarter of 2017 warns that some banks have been investing in higher risk longer-term assets versus short-term deposits.

The FDIC cautions that banks must ‘manage interest-rate risk, liquidity risk, and credit risk carefully to continue to grow on a long-term path’.

Here are my issues with the four ‘too big to fail’ money center banks.

Bank of America (BAC) is simple to break-up by spinning off investment banking firm Merrill Lynch. There appears to be some sexual harassment issues in one business unit this banking giant.

Citigroup (C) is more difficult to break-up but when a major bank faces fines of $335 million for raising credit card rates on consumers who missed monthly payments, they are ‘too big to regulate’.

JP Morgan Chase (JPM) plans to open additional local branches putting more pressure on local banks. In addition, the largest bank is raising rates on credit cards for those making their monthly payments to offset losses from those who are not. Regulators should break up this monopoly into JP Morgan and Chase bank.

We know the problems at Wells Fargo (WFC) and their continued fraud against clients. They have been and will continue to pay fines, but why do they remain a primary dealer of the Open Market Desk of the New York Federal Reserve? Perhaps Wells Fargo should be forced to spin off Wachovia. The fact that the New York Fed missed this fraud in their regulatory study of the bank, before naming them as a primary dealer, is clear evidence that the bank is ‘too big to regulate’.

Before Dodd-Frank regulations are rolled-back, let’s help local banks return to Main Street banking.

Fourth quarter FDIC data show that Quarterly Net Income came in at $25.5 billion down 41% year over year but adjusted for tax effects it would have been $42.2 billion slightly below the reading of a year ago.

Net operating income increased in the fourth quarter year over year to $192.2 billion up 5.5%. The increase came on higher net interest income, but noninterest income continued to slide due to lower servicing fees, weakening trading profits and lower net gains on loan sales.

I have been concerned about growing credit card debt, which grew by 8.2% year over year to $865 billion in the fourth quarter. Banks are experiencing a slight increase in net charge-offs led by credit cards.

The FDIC Quarterly Banking Profile For The Second Quarter Of 2017

Courtesy of the Federal Deposit Insurance Corporation

The number of FDIC-insured financial institutions fell to 5,670 in the fourth quarter down from 5,737 in the third quarter and down from 8,533 at the end of 2007.

Total Assets rose to $17.42 trillion in the fourth quarter, up 33.6% since the end of end of 2007.

Residential Mortgages (1 to 4 family structures) represent the mortgage loans on the books of our nation’s banks. Production rose to $2.06 trillion in the fourth quarter, still 8.1% below the pace at the end of 2007. Mortgage lending thus lags its potential.

Nonfarm / Nonresidential Real Estate Loans represent lending to construction companies to build office buildings, strip malls, apartment buildings and condos, a major focus for community banks. This category of real estate lending expanded to a record $1.391 trillion in the fourth quarter, up 43.6% since the end of 2007. This could be a source of stress given the risk of defaults as retail stores and malls that are shuddered.

Construction & Development Loans represent loans to community developers and homebuilders to finance planned communities. This was the Achilles Heel for community banks and the reason why more than 500 banks were seized by the FDIC bank failure process since the end of 2007. C&D loans rose to $338.3 billion in the fourth quarter up 2.3% from the third quarter, but 46.2% below the level at the end of 2007. This is evidence that market for new homes is well below potential.

Home Equity Loans represents second lien loans to homeowners who borrow against the equity of their homes. Regional banks typically offer HELOCs, but these loans continue to decline quarter over quarter, despite the dramatic rise in home prices. HELOC lending declined 1.5% in the fourth quarter to $411.2 billion and is down 32.3% since the end of 2007. The Dodd-Frank law makes HELOC lending a paperwork nightmare.

Total Real Estate Loans has a sequential growth rate of just 0.9% in the fourth quarter to $4.2 trillion, still down 5.5% since the end of 2007. It’s amazing how regulations meant to help consumers and small business on Main Street have slowed real estate lending.

Other Real Estate Owned declined by 7.1% in the fourth quarter to just $8.5 billion as formerly foreclosed properties return to the market. This asset category peaked at $53.2 billion in the third quarter of 2010.

Notional Amount of Derivatives declined significantly in the fourth quarter by 9% sequentially to $173.5 trillion. This exposure is still up by 4.4% since the end of 2007. It seems like the banking system may be reducing trading activities as such has been a drag on earnings.

Deposit Insurance Fund represents the dollars available to protect insured deposits. These monies are funded by all FDIC-insured institutions via annual assessments, with the largest banks paying the largest amounts. The fourth quarter DIF balance is $92.7 billion up from $90.5 billion in the third quarter.

Insured Deposits rose to $7.151 trillion in the fourth quarter and is up 66.6% since the end of 2007 as savors seek the deposit insurance guarantee of $250,000 available at each bank in which a savor has insured deposits.

By the end of September 2020 this fund is mandated to have the fund at 1.35% of insured deposits. The current level rose to 1.30% but the size of insured deposits continues to rise. If this ratio is not reached by the end of 2018 the largest banks will be assessed to close the gap.

Reserves for Losses increased to $123.7 billion in the fourth quarter, which is still 21.7% above the level shown at the end of 2007. This is a sign of continued residual stress in the banking system.

Noncurrent Loans began to rise again in the fourth quarter by 1.3% sequentially to $116.4 billion, now 5.9% above the level at the end of 2007.

Scorecard For The Four ‘Too Big To Fail’ Money Center Banks

Here Are The Weekly Charts For The Big Banks

Bank of America

Courtesy of MetaStock Xenith

The weekly chart for Bank of America is positive but overbought with the stock above its five-week modified moving average of $31.75. The 12x3x3 weekly slow stochastic reading is projected to end this week at 84.96 well above the overbought threshold of 80.00. Investors should buy weakness to my semiannual and annual value levels of $25.71 and $20.93, respectively, and reduce holdings on strength to my monthly risky level of $36.79.

Citigroup

Courtesy of MetaStock Xenith

The weekly chart for Citigroup will be negative given a close this week below its five-week modified moving average of $75.90. The 12x3x3 weekly slow stochastic reading is projected to end this week declining to 51.01 down from 54.51 on March 9. Investors should buy weakness to my annual value level of $64.72 and reduce holdings on strength to my monthly risky level of $80.25. My annual pivot of $73.43 has been a magnet.

JP Morgan

Courtesy of MetaStock Xenith

The weekly chart for JP Morgan is positive but overbought with the stock above its five-week modified moving average of $114.46. The 12x3x3 weekly slow stochastic reading is projected to end this week at 82.69 above the overbought threshold of 80.00. Investors should buy weakness to my semiannual and annual value levels of $98.79 and $93.20, respectively, and reduce holdings on strength to my monthly risky level of $129.49.

Wells Fargo

Courtesy of MetaStock Xenith

The weekly chart for Wells Fargo is negative with the stock below its five-week modified moving average of $59.22. The 12x3x3 weekly slow stochastic reading is projected to end this week at 39.33 down from 45.33 on Feb. 9. Investors should buy weakness to the 200-week simple moving average or the ‘reversion to the mean’ at $53.23 and reduce holdings on strength to my semiannual risky level of $65.08, which was set at the 2018 high of $66.31 set on Jan. 29.

My Conclusions For Longer-Term Investors

Based upon the wealth of information from the FDIC, buying the ‘too big to fail’ money center banks simple because they should benefit from higher interest rates is not a prudent strategy.

Be cautious given the changing banking regulations including the possibility that the biggest four banks could be broken-up. Banks seem to be reluctant to lend and instead are raising rates on credit cards and small business lines of credit beyond the rate hikes. The big banks could care less about Main Street USA.

The big banks have had difficulty in generating trading profits and each have their own regulatory issues. These show that they are ‘too big to regulate’ which indicates that there are likely undetected time bombs below the surface of these banks.

This article was written by

Richard Suttmeier

3.68K Followers

I am the Founder & CEO at Global Market Consultants, Ltd. I consider myself as a Financial Engineer with an engineering degree from Georgia Tech and a Master of Science degree from Brooklyn Poly. In 1972 I began my career in the financial services industry trading U.S. Treasury securities in the primary dealer community. I became the first long bond trader for Bache in 1978, and formed the Government Bond Department at LF Rothschild in 1981, helping establish that firm as a primary dealer in 1986. This experience gave me the insights to be an expert on monetary policy, which I feature in my newsletters, and market commentary. I formed Global Market Consultants Ltd at the end of 1988 and expanded on my analysis to include proprietary analytics. While operating Global Market Consultants I was the U.S. Treasury Strategist at Smith Barney 1991 through 1995, was Chief Financial Strategist at William R. Hough in St. Petersburg, Florida 1997 through 1999, and was Chief Market Strategist at Joseph Stevens 1999 into 2008. I began covering U.S. equities in 1997 and began to use ValuEngine as my stock screening tool in 2002 before joining them as Chief Market Strategist between September 2008 and November 2014. I was the Chief Market Strategist at Niagara International Capital Limited between December 2009 and December 2014. In 2005 through 2007 I wrote columns on RealMoney.com and authored TheStreet.com Technology Report. My unique coverage called for the housing bubble to pop in 2005 and for regional banks to collapse in 2006 and early-2007. This is when my proprietary analytics became known as value levels at which to buy on weakness and risky levels at which to sell on strength. I became an Expert Contributor for TheStreet.com in April 2012 and currently write one or two stories a day covering subjects such as: The housing market, community and regional banks, momentum stocks, earnings profiles both before companies report quarterly results and provide scorecards after reporting results. Many of my stories we include moving averages, momentum readings, analysts’ earnings estimates, and value levels and risky levels. Over the years I made frequent appearances on financial TV beginning in 1993 on CNBC covering the U.S. Treasury auctions and as a substitute for John Murphy on his segment called ‘Tech Talk’. I also occasionally appeared on CNN and Bloomberg. On almost every holiday I appeared for an hour covering stocks on a call-in / email-the-expert ‘Talking Stocks’ show on CNNfn. In 2002 I had my own show on Yahoo Finance TV called, ‘Traders’ Club with Richard Suttmeier’. When Fox Business began in late-2007 I was a frequent guest on ‘Money for Breakfast’. I also made appearances on Reuters TV, Yahoo Finance Breakout and BNN in Toronto. In recent years I shifted my focus to making presentations to various investor groups such as: MBA students at the University of Florida and South Florida, The American Association of Individual Investors, Wells Fargo Advisors, The Executive Form at the National Arts Club in NYC, Investors Roundtable of Wilmington NC, The Market Technicians Association, The Information Management Network when they cover Florida Banks in Ft Lauderdale, and the University of Tampa Investment Club. I was president of the Society for the Investigation of Recurring Events in NYC from 2000 into 2009. My background began on Long Island, New York. I graduated from Bay Shore High School in 1962, and was a member of the Honor Society, Golf Team, Math Team and Band. I graduated from Georgia Tech in Atlanta with a Bachelor of Industrial Engineering Degree in 1966, and was a member of Chi Phi Fraternity, the freshmen Golf Team, and was the captain of the Bowling team. I won the South East Regional Bowling Tournament in 1964 and won the National Intercollegiate Bowling Championship in the Doubles Event that same year. I graduated from Brooklyn Poly in 1970 with a Master of Science in Operations Research, Systems Analysis. My first job out of Georgia Tech was with Grumman Aerospace on Long Island 1966 through 1970 with project assignments on the Lunar Module and F-14 Tomcat Fighter Jet contract proposal. I was with Bank of New York in 1971, as the Senior Systems Analyst for computer applications for the Bank’s International Division. When I shifted my to Wall Street In 1972 I became a U.S. Government securities trader at Briggs Schaedle, a primary dealer where my father was Vice Chairman and my brother was Sales Manager. In 1977 I joined Loab Rhodes as a U.S. Treasury trader. Then my career advanced as noted above. I have been married to Linda since June 1969 and we are the parents of Stephen and Jason Suttmeier. Stephen has been married to Jennifer since 2004 and we have a granddaughter Emily and a grandson Robert. We have been living in Land O’ Lakes, Florida with Jason and his partner James since June 2009.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Investors Beware, The 4 'Too Big To Fail' Banks Are Not Great Long-Term Investments

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