The Trouble Isn’t Over for Banking: Here’s What to Expect
Just a few days ago, Warrant Buffett made a bold proclamation. He said that, as far as bank failures go, we’re not out of the woods yet. In fact, he even went so far as to say that the temptation to boost profitability by cutting financial corners is so widespread that this kind of problem is going to be whittling down the smaller banks in America for years to come.
Well, I think he’s right. I think what we’re about to see a major period of consolidation in the banking sector. Over the next few years, I expect to see the balance of power in banking shift decisively towards the biggest players in the sector.
I’m talking about massive mega-institutions like J.P. Morgan and Goldman Sachs. The next couple of years are going to apply major pressure across the banking sector, and it’s these huge players that are going to be in the best position to ride it out.
I see the same kind of consolidation potential coming from Fifth Third Bancorp and Comerica Inc., and make no mistake, both the potential and the pressure are going to be real and serious.
Since the Fed recently let slip that it expects a recession later this year, we’ve already seen some nervous action in the markets. There were sharp declines on the 11th, 12th, and 14th.
The collapse of SVB and Signature Bank still has serious ramifications for the rest of the sector. We’re getting even more uncertainty from the fact that REITs are also facing a huge stack of bearish paper.
That pressure is going to be felt more strongly in some places than others. For example, I would call this a bad time to be placing any bets on the future of First Republic Bank. I’ve noticed some huge bearish activity going on around that company in particular.
Huntington Bancshares Inc. is another firm that I expect to see struggling under the pressure of the next coming years. In any kind of consolidation process like this, there are going to be winners and losers. These much smaller institutions are going to have a lot less staying power under these conditions.
After all, a household name bank like Goldman Sachs has a total market cap of over $100 billion. For first Republic, the overall cap is less than $2.5 billion. Even in Huntington Bancshares, it’s less than $20 billion.
And again, J.P. Morgan Chase dwarfs them all with over $400 billion. That’s going to be the dynamic of this new banking ordeal. Smaller institutions are going to feel the pain. Larger ones are going to have the staying power. Then, after they’ve ridden out the storm, they are going to have major bullish opportunity.
As for how we play it ourselves, its too soon to say. We’ll need to get a feel for how earnings are going to make any informed trades. We need to keep an eye on how the initial earnings announcements within banking play out. Once we have a chance to see which way things are going, we can plan out our moves.
April 14 2023
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