The price movement in banks is likely to remain choppy for a short time before evening out and returning to previous highs. This Silicon Valley Bank (SIVB, Financial) panic reminds me of the 2020 oil panic, when oil prices went negative and a lot of industry participants dropped in share price in a similar fashion to how the stocks of banks have acted so far this week. Oil eventually came back in a big way, and I believe most of these banks will too. Moreover, most consumers' money is safe up to $250,000 as long as they are FDIC-insured, and the government has even fully bailed out Silicon Valley Bank depositors, which is a promising sign that not even businesses are exposed to as much risk from bank collapses as previously believed.
While I’m not happy that the government and the Federal Reserve guaranteed the deposits at Silicon Valley Bank, as I believe this could eventually lead to very bad future outcomes for accountability and risk management, it does provide banks with a similar size assurance that they will be able to keep depositors whole. With that in mind, here are two banks that I believe are now ridiculous bargains based on the lemming effect in selling that happened Monday in the market - First Republic Bank (FRC, Financial) and Western Alliance (WAL, Financial).
First Republic Bank
When Mark Zuckerberg wants a mortgage or to borrow against his shares, he used to go (and potentially still goes) to First Republic Bank (FRC, Financial). It has been a wild ride in the first two days of trading this week for the company’s stock. However, a drill down into the company’s balance sheet shows this bank is a lot better off than Silicon Valley Bank. First of all, First Republic’s mortgage-backed securities comprise around 30% of its investment portfolio, less than 5% of its total assets. Secondly, with its current loan portfolio, the bank generated net interest income of $1.2 billion in the last quarter alone. Total revenue rose to $1.46 billion and net income tallied $386 million. If that is a sign of times to come, the $5 billion market cap looks like a massive bargain.
The stock was trading above $100 a share a week ago and is priced at just five times earnings as of this writing. It also has a GuruFocus business predictability rating of five out of five stars, and it trades below GF Value, The recent selloff has even triggered a value trap warning, though I think this is just a case of the market being irrational.
First Republic has $212 billion in total assets, $166 billion in net loans and a loan to asset ratio of 0.78. At Bank of America (BAC, Financial), the loans are just one third of total assets. At the more conservative regional bank Trust, the loans are 58% of total assets, and are still priced at 7.5% of total assets after the 33% haircut. If First Republic were priced on the same level, it would be trading nearly three times higher. As long as the financials hold up, I believe it's only a matter of time before the valuation recovers..
Western Alliance Bancorporation
Western Alliance Bancorporation (WAL, Financial) has had an even wilder week, dropping over 88% at the low on Monday before bouncing back over 300%. Now, trading at just 2.5 times forward earnings with a $4.1 billion market capitalization, Western Alliance may offer solid upside potential in the short term and pay incredible income over the long term with its dividend yield of 4.44%.
Considering the Silicon Valley Bank crisis, I think it’s likely the banks that came under pressure the most will keep their dividend rates and possibly expand them in order to attract shareholders, which is good news for shareholders of Western Alliance Bank. Even with the stock up big from the absolute bottom, the bank still has a lot of room to run in my estimates. It’s no wonder Ken Griffin’s Citadel Advisors announced that it picked up a 5.4% stake in Western Alliance on Tuesday. That alone should instill some confidence in the banks assets, which total $67 billion.
Like First Republic, Western Alliance has a pretty high loan to asset ratio, standing at 0.76. From those loans, the bank generated nearly $2.7 billion in interest income during the last 12 months and over $1 billion in net income. If all is well with its balance sheet, this stock could be trading back above $70 a share sooner rather than later by my estimates from analyzing its loan portfolio.
To that note, Western Alliance’s CEO issued a statement on Tuesdya via an 8-K filing, where he pointed out that more than 50% of the bank's total deposits were insured. “Although there have been no sales of securities to date, if adjusted to reflect unrealized losses in our held-to-maturity and available for sale investment book, our CET1 capital ratio as of 12/31/22 would be approximately 7.9%, which compares very favorably to peers and reflects the fundamental strength of our bank,” he said.
Shocks like this come around every so often and it’s always good to have dry powder. If we take a price to total asset approach (compared to Truist as above), my fair market cap estimate jumps to $5 billion. If we take a price-earnings approach, my fair market cap estimate goes up even further to nearly $10 billion. Either way, these are both above the market cap of $3.5 billion as of this writing.
Why I still believe in banks as investments
The products banks offer are mostly made up and funded completely by the push of a button. These financial institutions make money off of loans made from depositors' capital. This fractional banking is always going to produce a certain amount of risk taking, which is why this won’t be the last shock to the banking system. No gold or crypto asset will stop that from happening as it's born from panic; however, that’s why the country has the Federal Reserve. Like the Fed or not, we’ve done alright as a country in the last 109 years with it around.
