State of the banks

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Recent news post Brexit have left the world wondering, what is the state of the world banking systems, which banks have the strongest balance sheets and which ones are the greatest risk for a breakdown in the EU banking system. First and foremost the immediate reaction in the markets was downward pressure on nearly all global currencies and an appreciation of the dollar. Italian banks have been in the news recently as being the most vulnerable ones that could have the worst performing loans in the EU market if things go sour. German banks are well capitalized as always, but they definitely have a disproportionately high exposure to London.

Many European countries are currently on the ground in China right now promoting immigrant investment programs to stimulate their economies. They will be ramping up their efforts now with the RMB becoming more valuable against the pound and the Euro (that is their main marketing angle). Chinese banks are also looking healthy on the surface, but many pundits expect real estate market speculation to create several toxic loans similar to the US housing financial crisis in the coming years. Luckily they have two things working for them, 1, the sate owned banks are not as transparent as our own, thus you may never know the true default rate, and 2, most loans are not the typical NINJA loans of the financial crisis (no income, no job, no assets) with much better down payment allocations to value ratios.

In the U.S., banks like JP Morgan and Goldman have significant operations in the EU via different types of market making, foreign loan portfolios and various derivatives and arbitrage positions. Wells Fargo seems to be the best capitalized and carries the least exposed debt to the European market; with many of their loans being US based home mortgages. Bank of America as of recent has also tried to emulate the Wells Fargo business model as Brian Moynihan knows that Warren Buffet is Well’s biggest fan, with Wells Fargo being Berkshire Hathaway’s largest holding. Buffet also holds a ton of B of A preferred which currently represents debt, but if they can prove solid enough for Berkshire to convert to common, that could catapult Bank of America’s stock price which currently sells at roughly a 30% discount to book value (versus Wells which is between 1.3-1.5X book).

Investing in the banks will be all for not if the Fed stalls on interest rate hikes, decreasing the outlook for the net interest margins that banks with large deposits depend on. If any investors are reading this, what is your favorite bank to bank with and which to you believe presents the best value as an investor?

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