Like a moth flying around a campfire, it is easy to fly in and get incinerated. But I can’t resist looking at more of these regional banks. When you have a lot of third parties claiming to be purchasing puts on the next one bound to be FDIC’ed (the earthquake, in my view, appears to be finished), one would suspect that there is going to be a boomerang effect on these entities as shorts get cleaned out.
The one I’ve been looking at is Customers Bankcorp (NYSE: CUBI), notably because it doesn’t pay a common share dividend and is trading well below book value.
By most accounts it is not an atypical regional bank. It does the usual stuff. The borrow, however, has jacked up from 50bps to 800bps over a month.
In many instances, looking at a chart before the 2020 Covid crisis hit should be a reasonable barometer of economic health of these firms. Indeed, CUBI at this era was around $20-25/share, which is its present trading price.
However, 2019 featured something that we do not have today. A positively sloped yield curve.
Playing around with the dynamic yield curve chart, the short term to long term curve has nearly always featured a positive slope for most of the 2010’s decade.
Today that is heavily negative.
So while there is an argument to be made that entities such as CUBI can run off their books and an investor can claim capital appreciation, theoretically speaking the economic environment for a bank (traditionally having a finance model of “lend long and borrow short”) continues to remain incredibly adverse to profitability, especially as more and more customers want to escape zero/low-yield purgatory for idle cash and can do so with a click of a few mouse buttons.
This moth is happy to stay away from the campfire.
The book on CUBI has long been that the Sidhu family is not entirely trustworthy and/or too clever by half. I’m sure the same could be said, of course, of many small banks, but this perception perhaps creates idiosyncratic risk (or opportunity!) so I’m not sure it’s a plain-vanilla example. I think there is or will be significant opportunity in this space, but when is anyone’s guess and it probably is not worth the time given the need to bet on so many variables. The ECIP-recipients story has been bandied far and wide, but the combination of cheap capital and a probable government wish not to be embarrassed by a handout recipient going under or suffering distress might be enough to give them a leg up. I have been buying PCB for this reason, along with the idea that a large Korean-speaking clientele offers a little bit of an advantage, because they’ll be less likely to switch to a larger less Korean-focused bank. But this is just degeneracy speaking, and you are likely right that it’s too much of a bet, too much brain damage.
“I have been buying PCB for this reason, along with the idea that a large Korean-speaking clientele offers a little bit of an advantage, because they’ll be less likely to switch to a larger less Korean-focused bank.”
I think this is a good competitive advantage observation, to a limit. One could wonder what damage a psy-ops from JPM or a competitor on Kakao could do spreading rumours about the solvency of PCB, for example.
Touching anything on the internet these days seems to induce brain damage!
Undeniable!