Bank, real estate, gold

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Mikael Syding
21/03/2023 | 6 min read

For example, is it already time to buy Swedbank and Danske bank again. Swedbank has fallen from 220 to 173 in just a few weeks. In just one month, the report for the first quarter will be presented. It should once again be really strong and with minimal credit losses.  Before that, you also receive the dividend of SEK 9.75/share.

How to make the most of the banking crisis in March 2023

On the other hand, the stock has risen by as much as 15% in twelve months and we are heading into a house price-led recession where consumers and borrowers are being squeezed hard by high interest rates and food prices. The next shoe to drop will also be rising unemployment.

For the banks, the development means that they have to raise deposit rates in order to retain customers, at the same time that the customers receive less money overall at the same time as an incentive to invest the money in fixed income funds. Still outweigh the positive effects of increased interest margins, but in step two, the cost of financing and credit losses increase at one end of the calculation and weaker demand for loans at the other. Profit forecasts for Swedbank are still being raised, something I expect will continue in connection with the first quarterly report. At KoyFin, the profit forecast is SEK 27/share, i.e. a Price / Earnings P/E ratio of just 6.0 (calculated on a price of SEK 163 after dividend). Normally, banks are rather valued at P/Book in relation to the return on equity, but the share price moves quite well in line with the earnings trend as well.

However, it is worth remembering that before the banking crisis in 2008, the share price peaked already in February 2007, while the profit estimate continued to rise until October 2007. Before the slowdown in 2018 and further into the pandemic bottom in 2020, the share price peaked in February 2017, but not the profit estimate until a full two years later in February 2019 – and it wasn't even a banking crisis but just some economic slowdown. It therefore seems perhaps that it is, after all, too early to rush after the Nordic banks after only two weeks of price falls. This applies in particular if you widen the perspective a little and see that bank shares have done extremely well over a one-year (Swedbank +16% excl. dividend) and three-year horizon (+55% ex ex.).

The Nordic banks should have a good capital buffer and have not indulged in the same type of speculation as the American niche banks Silicon Valley Bank, Silvergate and First Republic. But just because Swedbank and Danske won't get into real trouble means they'll survive margin pressure and credit losses, not to mention worse investor sentiment. In terms of confidence, no one can afford to lose money on banking investments in the wake of extremely negative signals from the US.

Namely, it is extreme when the government suddenly guarantees deposits above the guarantee limit of USD 250,000. It signals that one sees an imminent systemic risk. A bank run can spread to several small banks and on to slightly larger banks until the entire sector has serious problems. This is what happens when customers use up their bank accounts or move the money to better alternatives. The willingness to lend as measured by the Senior Loan Officer survey was already low even before the ongoing banking debacle. It gets even worse now that there is a lack of liquidity and deposits are becoming more expensive, not to mention more difficult to sell bank bonds in the market.

It also brings us unsought to what the really good opportunities in the market are right now: buying bonds, not least bank hybrids and real estate bonds, or fixed income funds with bonds with long maturities. Of course, it is not without risk, because it could turn out that both the banking crisis increases and that inflation and interest rate increases worsen [which lowers the price of bonds further], alternatively that the currently surprising strength of the economy turns into a hard landing with large credit losses and financing problems . It's almost time for a financial crisis again after 15 years. However, that is not my main scenario at all given the banks' strong balance sheets.

However, it is still worrying now and a negative signal value that 11 major banks deposit $30 billion with First Republic, ie they were pressured to invest in low-yielding accounts without guarantees. It is also a negative signal with record moves in the Eurodollar market, where the previous record for price movement set in connection with the bankruptcy of Lehman Brothers was doubled last week.

The crisis is far from over. We have only seen the beginning of the underlying problems with raising interest rates so quickly after getting the whole economy used to zero interest rates for fifteen years. There are now much better options than bank accounts. There is thus less capacity to lend money, as well as less willingness to both borrow and lend. This normally leads to a weaker economy with a lag of a few years. This means that it should start showing up around now, but also that the latest rate hikes won't have their full negative effect until 2024.

The economy, the labor market, consumption is so far surprisingly strong due to savings from the Covid stimulus. It is confirmed by statements from companies such as Visa, Mastercard, the airlines and others who say that customers show no signs of reduced demand. This likely means that central banks will continue to raise interest rates. After all, controlling inflation is their primary mission. They can thus brake with one foot and simultaneously accelerate with the other. They bail out the banks and their account holders, but keep raising interest rates to curb inflation.

What happens now? What do you dare to invest in? Normally, one should limit risk-taking and make sure to have liquidity left over for bargain purchases during weak weeks and months. It can sometimes even about the best finds being made on occasional panicky days. Then you must have cash ready. We can never know if there will be a sharp decline in the stock market, but it is becoming more and more likely with a consumer and house price led recession as inflation and higher interest rates mean that there is much less money left over than in the past.

The stock market is still more expensive than at the peak in March 2000 measured as Price/Sales. It is remarkably expensive and can only be justified with a belief in much higher growth over the next 25 years than the last 25, or permanently higher profit margins. Both assumptions seem unreasonable, even though profit margins in the US are currently at a high 9%, ie 40% higher than the historical average.

It is difficult to make an investment case in the banks (and real estate companies) by looking only at the valuation and the recent profit development. However, if you look at price patterns from previous recessions, we are only about halfway through the downturn. Incidentally, the same applies to the entire stock market index. The last half year looks like a little mid-cycle pause, a kind of body trick that tricks investors into thinking the worst is over, right before it actually begins. We have long been accustomed to investors using leverage in search of higher returns, but now that interest rates are rising, the opposite is likely to happen, with people borrowing less and less and chasing liquidity instead of risky return potential. Now that you can get 12% returns on reasonably safe corporate hybrid bonds, there is very little reason to take stock market risk on year 2000 valuations. No, instead one should look at various forms of ready money, such as bonds, gold and even cash despite the annoyingly high inflation.

Gold has been a bit of a disappointment, despite war and inflation, but the price tends to pick up when yield curves are inverted because it signals lower interest rates to come. Today (March 17, 2023) a new record was set for the gold price of SEK 664.5/gram. It is almost ten times as high as in August 1999 when the price was below SEK 70/gram. In addition, the price is actually up almost 10 percent in March alone, due to the banking crisis and signs that the Fed wants to save the banks with extra liquidity. It is an excellent example of how central banks erode the value of currencies and how important cash management is.

With a bit of luck, you can buy bonds and gold today and later exchange for even more shares when the recession starts to bite seriously in a year or so. Maybe the sweet spot for this will be in the first quarter of 2024. Until then, I will continue to hesitate with my finger hovering over the buy button in Swedbank and Danske bank. It looks cheap, but the historical precedents are discouraging.


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