2015 Best Year Ever For Banks – Richard Bove

Richard X. Bove, Vice President Equity Research at Rafferty Capital Markets, highlights the major issues with banks in 2015.

Major issues

• 2015 was the most successful year fundamentally in banking industry’s history; not so stock wise
• Financial Indices
  • XLF declined 3.6%; down 6.9% YTD in 2016
  • KBW Index declined 1.6%; down 11.1% YTD in 2016
  • S&P 500 declined 0.7% in 2015; down 2.5% YTD in 2016
• Total commercial banking industry balance sheet in 2015 as reported by the FDIC
  • Equity (unusually high levels)
    • Common equity at all-time record $1.68 trillion
    • Common equity to assets at 11.3% highest since 1939
    • Equity plus reserves as a percent of assets highest since 1935
  • Liabilities (solid funding base)
    • Deposits at all-time record $11.35 trillion
    • Deposits highest as a percent of assets since 1991
  • Assets (high level of liquidity indicates low level of loan risk)
    • Cash and Securities 2nd highest on record after 2014 at $4.75 trillion
    • Cash and Securities at 31.9% of assets lower than 2014 but highest since 1983
    • Net loans at $8.06 trillion highest in history
    • Loans equal 170% of cash and securities in 2015 compared to 315% in 2007
    • Loans to deposits 71.0% in 2015 compared to 89.4% in 2007
    • Loans to common equity have risen in this cycle (2010 to 2015) but prior to this at lowest level since 1950
• Total commercial banking industry income statement in 2015 as reported by FDIC
  • Revenues
    • Net interest income at all-time record of $398 billion despite record low interest rates on Fed Funds
    • Non-interest income second highest of all-time at $234 billion despite trading issues
    • Revenues at all-time record at $632 billion
    • Operating income up by $15.4 billion in year while operating expenses dropped by $5.9 billion
  • Profits
    • Pre-Provision, pretax income 2nd highest of all-time at $247 billion
    • Pretax income at all-time record at $214 billion
    • Net income at all-time record of $152 billion
    • Common dividends at all-time record $97 billion
• Total commercial banking industry loan quality in 2015 as reported by FDIC
  • Non-performing loans at $114 billion down from $253 billion in 2009
  • Non-performing loans at 1.39% of loans compared to 31 year average of 2.11% (1984 first year information gathered)
  • Net charge-offs at $33 billion down from $176 billion in 2010
  • Net charge-offs to loans at 41 basis points compared to 81 year average of 56 basis points (1934 first year information gathered)
• Bottom line stocks being pounded lower in most successful year fundamentally in the industry’s history

Fears of “monster-under-the-bed” were absurd in 2015 and are believed to be unrealistic today