Aaron Back
speaker
279 appearances
6 recordings
1 series
first heard Jul 2018
last heard Jul 2019
Aaron Back’s voice in public audio — every appearance, attributed to the second.
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Yeah, that's right.
As you said, they're trading at quite a low multiple of forward earnings at the moment.
They've also just announced big increases in their buybacks and dividends after they all just passed the stress tests that the Fed does every year.
So they look like attractively priced investments right now, at least initially.
I mean, the question is, is, first of all, the economic boom going to go on or are we on the verge of some kind of downturn?
And second of all, how much is a negative scenario like a downturn priced into that cheap valuation?
That's really the question you have to ask yourself.
My view is that if a downturn does come, it is not priced in despite how cheap they look.
And that's why I would be a little bit cautious with the banks right now.
Right.
That's correct.
So when we say that the banks are cheap based on estimates of forward earnings, we then have to go and look at what's in those estimates.
So what I did in my column today is I went and looked at, for example, how much are analysts expecting interest rates to come down.
And between now and 2020 –
analysts are really only expecting the margin that banks earn on their loans to go down by 0.04 percentage points.
So they're expecting a very small decline in the interest income of these banks.
And I think that if the market action that we've seen recently with the rates on treasury yields coming down continues, and if the Fed goes and cuts rates, I think you could see these banks making a lot less than analysts currently expect.
Net charge-offs are effectively defaults.
So that's loans that they're writing off, that they're saying, we're not going to get this money back.
We're not getting this money back.
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