I have been super busy between work and daily family activities leaving very little time to even look at my portfolio. Having said that, I have been watching the banking crisis unfold from the sidelines. This is a still a developing story and we do not know what lies ahead in this saga. My intention here is to not react but instead look for broad patterns and see how this story fits in my long-term picture as far as my portfolio.
Banks have been interesting investments ever since the GFC and the implosion of Lehman brothers in 2008. Having spoken to several investors who lost a lot of money during that period, I can understand when they are very wary while investing in banks. There is also the rise-and-rise of fintechs and online-only banks which has left the traditional brick-and-mortar bank branches to be rather useless. How often do you visit a bank branch in person? Once a year maybe? Yeah, you are not alone. There are very few reasons why you would want a in-person interaction at a bank: cashier’s check, money order etc.
But despite of the risk of several of these smaller banks, statistics show that the average retail customer would still prefer to hold their primary account at one of the larger traditional banks. This includes things like, say, a direct deposit for the bi-weekly paycheck. And there is a huge reason for this…..TRUST.
The whole SVB implosion saga underlines this perfectly. The general sense is that a bank-run like scenario could play out with a smaller bank, but would NOT happen with a more traditional bank like JP Morgan Chase or Wells Fargo.
I am invested in JP Morgan Chase (ticker: JPM), one of the largest banks in the US, if not the world. My investment thesis is that while traditional banking may not be disrupted by any major technological changes in the immediate future, I cannot see how a country’s economy would function without such banks altogether. But one part of me was always vary of a bank-run like scenario. Therefore, to safeguard my investment, I had to go to with a bank that was well managed, had a strong balance sheet AND, more importantly, a massive customer base. JPM was the one that checked all of these boxes.
Bank-run scenarios aside, I am also vary of the fact that banks are highly levered businesses with poor ROIC trends. JPM is hovering around the 6-7% ROIC ratio and trades at almost a 1.5 Price/Tangible Book Value ratio at the time of writing this. JPM has been a good dividend payer. However, since the last stress tests, JPM’s board decided to NOT raise the dividend last year citing “capital allocation challenges in the near term”, even though they had the clearance from the Fed to raise it if they wanted to. JPM is currently yielding near 3.1% with a 5-year dividend CAGR of nearly 13% and a dividend growth streak of 8 years.
So what is my stance with JPM after this episode? I am going to continue HOLDing this stock but will not be adding at current prices since I feel the stock is richly valued. I am, however, planning to downgrade this stock from a “Core” Holding to a “Bond-like” holding with maybe a smaller percentage allocation.