August 27, 2023
The financial sector has recently witnessed a tumultuous period with prominent players, Citigroup (C -13.9%), Bank of America (BAC -10.8%), Bank of Montreal (BMO -10.2%), Wells Fargo (WFC -9.9%), Royal Bank of Canada (RY -9.5%), HSBC (HSBC -9.0%), Toronto-Dominion (TD -8.9%), Canadian Imperial Bank of Commerce (CM -8.7%), and Scotiabank (BNS -8.2%), experiencing significant market losses over one month. As investors grapple with the sudden downturn, it’s essential to study the factors driving these declines and explore the potential implications for these banking giants.
Navigating Uncertainties and Structural Changes at Citigroup (C):
Citigroup, one of the world’s largest financial institutions, has been grappling with an ongoing series of challenges that have contributed to market losses of close to -50% since June 2021. The company has recently undergone significant structural changes in the wealth management unit and with reduced service fees in the retail banking unit, causing analysts to decrease earnings estimates. A few years ago, management decided to divest certain international retail banking. But of all the major banks, the global financial crisis of 2008 hurt Citi the most, and it never fully recovered.
Challenges facing all banks at the moment.
Economic Uncertainty: The banking giants are grappling with the impact of higher lending rates, global economic softness, and concerns about inflation and geopolitical tensions. These factors influence decisions for most types of loans and trading decisions that negatively impact operating income.
Interest Rate Environment: A surge in the global cost of money has affected net interest margins, making it challenging to generate robust net interest income. Loan losses increase, and loss provisions are increased. Concerned investors are selling their shares.
Trader Sentiment: This month, the Fear-Greed Index turned to fear, causing traders to sell their shares.
Government Regulatory Changes: Regulatory changes and shifts in government policies in recent years have negatively impacted banking operations and profitability. The uncertainty surrounding potential regulatory changes also leads to market volatility and investor anxiety.
Digital Transformation: As the banking sector transforms into a new era of digital money, banks must manage changing customer needs and preferences for digital services. Adapting to these changes requires significant investments that impact profitability.
In summary, this is a good time to avoid shares in the giant banks. For the Maverick Investor Portfolio, I continue to hold JP Morgan Chase (JPM) (although at a reduced portfolio weight) because, in the long run, this company is a winner. Its 10-year average total return is around +14.2%, ninth best in the Dow 30. When JPM prices drop a lot, these shares should be accumulated.
30-day Chart of Citigroup
30-day Chart of Scotiabank
30-day Chart of JPM (blue), Scotiabank (orange), C (thick red)
10-year chart of JPM (blue), Scotiabank (orange), C (thick red)
