(Source: Google Finance)
The above chart shows the comparison between the % returns of the S&P 500 Index (red line) and the KBW Bank Index (blue line).
As shown, the U.S. banking sector had suffered a massive sell off since the subprime crisis and till date, it is still down 60% compared to the S&P 500 which has almost recovered to the level since 2007. This decoupling between the two indexes has been the result of the indiscriminate selling of the U.S. banks with investors largely driven by headline news from the Eurozone rather than their actual underlying fundamentals.
Even though there is much to be worry about regarding the state of many European nations, we believe the situation has been largely overblown. Unlike their European counterparts, the U.S. banks had undergone a period of extreme distress since the Lehman collapse and the survivals of today had gone through a period of major consolidation.
Systematically important financial institutions have become even BIGGER to FAIL, especially so when they are central to the survival of the U.S. economy. Under the scrutiny of the federal and state governments, the U.S banks have deleveraged and their balance sheets are at one of its strongest. The banks are recapitalized, with many of them holding on to reserves not seen in decades that they had operated.
At present, we believe the U.S. banking sector holds a lot of opportunities. The assets and earnings power of many such institutions have been greatly underestimated due to provision for loan losses, litigations, R&Ws, etc.
In our subsequent posts, we will go into detail to explain some of the large financial positions we currently held in our portfolio.
So stay tuned!
(Feel free to take a look at our portfolio.)