Bank Stocks

About Bank Stocks

Banks are leveraged bets on rates and on credit, and they are permanently cheap on earnings for the good reason that the earnings can vanish. A bank runs on a fraction of equity against its assets, so a loan book going wrong hits shareholders long before it hits depositors.

The regional bank failures were the reminder of what actually kills these: not credit losses but funding. Deposits can leave faster than assets can be sold, and a bank that has to sell bonds at a loss to meet withdrawals discovers its book value was theoretical. Anyone owning regionals should know the deposit mix and how much of it is uninsured.

The rest is more mundane. Higher rates widen the spread between what loans earn and deposits cost, up to the point where they start breaking borrowers. Commercial real estate exposure is the credit worry most worth checking, and it is concentrated in the regionals rather than the large banks. Capital rules set by regulators cap how much of the earnings can come back to shareholders, so buyback capacity here is a policy decision as much as a management one.

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