The Lemon Fool

This article got me thinking:
https://seekingalpha.com/article/436901 ... k-up-truck

Even if we assume banks emerge in 2021 with 'excess' capital, it seems to be a much better use of that capital would be share buybacks rather than ordinary or special dividends, given the huge discount to book value.

Best wishes

Mark.

Share buybacks are a logical way of returning capital. However, I would expect the price to go up as we go into 2021 - notwithstanding Brexit.

johnhemming wrote:I would expect the price to go up as we go into 2021 - notwithstanding Brexit.

True, but when I held Barclays I spent years anticipating the share price going up. Then again, now I've sold I'm sure it will!

Best wishes

Mark.

Barclays is suffering from known unknowns. Perhaps by mid May 2021 they will mainly be known knowns.

johnhemming wrote:Barclays is suffering from known unknowns. Perhaps by mid May 2021 they will mainly be known knowns.

and possibly unknown unknowns?

scrumpyjack wrote:and possibly unknown unknowns?

True.

ADrunkenMarcus wrote:This article got me thinking:
https://seekingalpha.com/article/436901 ... k-up-truck

Even if we assume banks emerge in 2021 with 'excess' capital, it seems to be a much better use of that capital would be share buybacks rather than ordinary or special dividends, given the huge discount to book value.

Best wishes

Mark.

Buybacks at these prices make no sense at all. I want the company to be buying my shares off me when the price is high, not when it is low. When it's low I want to be the one buying...

GS

GoSeigen wrote:

ADrunkenMarcus wrote:This article got me thinking:
https://seekingalpha.com/article/436901 ... k-up-truck

Even if we assume banks emerge in 2021 with 'excess' capital, it seems to be a much better use of that capital would be share buybacks rather than ordinary or special dividends, given the huge discount to book value.

Best wishes

Mark.

Buybacks at these prices make no sense at all. I want the company to be buying my shares off me when the price is high, not when it is low. When it's low I want to be the one buying...

GS

Oh come on that is just stupid as you well know. You will be the one complaining if banks start buying in their own shares once the price rises. The price is low so I expect you will be buying tomorrow. What are you waiting for?

Provided the provisioning is reasonably adequate (and I do not see us knowing this for some time) then certainly all banks have more money than they know what to do with so a reinstatement of the dividends is likely (whether back dated I doubt) before any buybacks or possibly at the same time.

Dod

ADrunkenMarcus wrote:This article got me thinking:
https://seekingalpha.com/article/436901 ... k-up-truck

Even if we assume banks emerge in 2021 with 'excess' capital, it seems to be a much better use of that capital would be share buybacks rather than ordinary or special dividends, given the huge discount to book value.

Best wishes

Mark.

Why would you want any company with such a poor Return On Equity to buy it's own shares? I would rather take the dividend and invest it in something else with a better return, if it's all the same. You also need to understand what makes up the Book Value of a bank. Most of it will be customer loans, many of which will be impaired or bad in the very near future, so the discount to book is a mirage. In the case of Lloyds the Book Value was £48bn at end of June and net loans was just over £500bn. So in simplistic terms, you only need 10% of loans to go bad and the discount to book disappears. Take the dividend.

All the best, Si

simoan wrote:

ADrunkenMarcus wrote:This article got me thinking:
https://seekingalpha.com/article/436901 ... k-up-truck

Even if we assume banks emerge in 2021 with 'excess' capital, it seems to be a much better use of that capital would be share buybacks rather than ordinary or special dividends, given the huge discount to book value.

Best wishes

Mark.

Why would you want any company with such a poor Return On Equity to buy it's own shares? I would rather take the dividend and invest it in something else with a better return, if it's all the same. You also need to understand what makes up the Book Value of a bank. Most of it will be customer loans, many of which will be impaired or bad in the very near future, so the discount to book is a mirage. In the case of Lloyds the Book Value was £48bn at end of June and net loans was just over £500bn. So in simplistic terms, you only need 10% of loans to go bad and the discount to book disappears. Take the dividend.

That's a bold claim, Si! Would you mind explaining the reasoning behind it? Personally I think it is 100% wrong, but as you made the prediction I'll let you justify it first.

GS

Dod101 wrote:

GoSeigen wrote:Buybacks at these prices make no sense at all. I want the company to be buying my shares off me when the price is high, not when it is low. When it's low I want to be the one buying...

GS

Oh come on that is just stupid as you well know.

Well as I am a stupid person that's not really surprising is it?

You will be the one complaining if banks start buying in their own shares once the price rises

Now you are just being abusive. Who are you to say what I will be doing? Maybe I won't complain -- maybe I'll be stupid again and defend the buybacks, just as I have in the past -- see threads on BP for example. Also look at the price BP was buying shares and what their price is now.

GS

GoSeigen wrote:

simoan wrote:

ADrunkenMarcus wrote:This article got me thinking:
https://seekingalpha.com/article/436901 ... k-up-truck

Even if we assume banks emerge in 2021 with 'excess' capital, it seems to be a much better use of that capital would be share buybacks rather than ordinary or special dividends, given the huge discount to book value.

Best wishes

Mark.

Why would you want any company with such a poor Return On Equity to buy it's own shares? I would rather take the dividend and invest it in something else with a better return, if it's all the same. You also need to understand what makes up the Book Value of a bank. Most of it will be customer loans, many of which will be impaired or bad in the very near future, so the discount to book is a mirage. In the case of Lloyds the Book Value was £48bn at end of June and net loans was just over £500bn. So in simplistic terms, you only need 10% of loans to go bad and the discount to book disappears. Take the dividend.

That's a bold claim, Si! Would you mind explaining the reasoning behind it? Personally I think it is 100% wrong, but as you made the prediction I'll let you justify it first.

GS

It is just my opinion that banks will have bad loans in the near future (next 12-24 months). If you think that's wrong, fine, we'll see whether it proves correct or not but I'm investing on that basis. That's why I have large holdings in two insolvency firms . I'm no expert on bank balance sheets (who is?) but since a significant percentage of the assets on the balance sheet are customer loans and the book value is the difference between two very large numbers, it will not take much loan impairment percentage wise to wipe out the current discount to book value.

It's all rather besides the point though with regard to the OP. Why would any shareholder think it's a good idea to let a company with a dividend yield higher than it's ROE buyback it's own shares? There's only one good reason to do buybacks if you're the management of such a company...

All the best, Si

The banks are reserving for impairments. I see the amount reserved each quarter, but I don't know where to find the total amount reserved. A lot of the really insecure business finance is underwritten by the government (with a NIM of 2.5%). The banks are also able to get relatively cheap money for other purposes.

As a shareholder I am generally happy when the companies buy back shares at below the net tangible value per share, or even when they buy back shares below the net asset value.

However, I am not a fan of buybacks at high prices.

simoan wrote:I'm no expert on bank balance sheets (who is?)

Me?

but since a significant percentage of the assets on the balance sheet are customer loans and the book value is the difference between two very large numbers, it will not take much loan impairment percentage wise to wipe out the current discount to book value.

Okay, opinion is one thing and saying you don't really know is at least honest. Really though, it's not hard to discover that most of the loans on banks' balance sheets are UK mortgages originated in the period to roughly 2008. These are NOT non-recourse loans like in the USA. They are backed by security which is mostly standard residential property. The value of the security is almost double the outstanding value of the loans.

So I don't know if you understand the implication of what you wrote above, but you were implying that in your opinion, a large number of customers are going to default on their mortgage payments AND they are going to have their properties repossessed AND the banks will be unable to sell them above 50% of their current value. AND the 5% just saved in dividends will get used up too.

But even if all the above calamity happens, that's only a 10% hit to the banks' earning power on their historical portfolios, they will be writing very profitable new business with house prices less than half their current value over the next 20 years, so the effect on their business going forward should be minimal IMO. To me, current pricing of UK bank shares is an anomaly and so I have been buying.

Having said that it's probably safer to go with Dod's assessment of my stupidity. Better to go with your doomsday scenario and stick to cash, and clear up when the disaster has struck.


GS
JH: How are buybacks at high prices a problem? If you judge the price is high you have already sold, and the buybacks have no effect on you; at a minimum they offer additional liquidity for you to sell into...

GoSeigen wrote:

simoan wrote:I'm no expert on bank balance sheets (who is?)

Me?

but since a significant percentage of the assets on the balance sheet are customer loans and the book value is the difference between two very large numbers, it will not take much loan impairment percentage wise to wipe out the current discount to book value.

Okay, opinion is one thing and saying you don't really know is at least honest. Really though, it's not hard to discover that most of the loans on banks' balance sheets are UK mortgages originated in the period to roughly 2008. These are NOT non-recourse loans like in the USA. They are backed by security which is mostly standard residential property. The value of the security is almost double the outstanding value of the loans.

So I don't know if you understand the implication of what you wrote above, but you were implying that in your opinion, a large number of customers are going to default on their mortgage payments AND they are going to have their properties repossessed AND the banks will be unable to sell them above 50% of their current value. AND the 5% just saved in dividends will get used up too.

But even if all the above calamity happens, that's only a 10% hit to the banks' earning power on their historical portfolios, they will be writing very profitable new business with house prices less than half their current value over the next 20 years, so the effect on their business going forward should be minimal IMO. To me, current pricing of UK bank shares is an anomaly and so I have been buying.

Having said that it's probably safer to go with Dod's assessment of my stupidity. Better to go with your doomsday scenario and stick to cash, and clear up when the disaster has struck.

GS

So you're talking your own book. It's not just me though, is it? Institutions that analyse banks much more closely than any of us here must feel the same or the share price wouldn't be where it is. The only explanation is that the market feels that the discount to book value is merited due to a question mark over potential asset impairments, otherwise they'd be filling their boots. No-one has to own shares in banks and I only do so through the FTSE100 ETF I bought in March and April as a blunt instrument for feeling the index was oversold. Even though I'm a contrarian at heart I have no interest in owning bank equity outside of a collective investment.

All the best, Si

GoSeigen wrote:JH: How are buybacks at high prices a problem? If you judge the price is high you have already sold, and the buybacks have no effect on you; at a minimum they offer additional liquidity for you to sell into...

It depends really on the timescales during which you hold the stock. I am not a buy and forget holder, but I may hold more than a year and hence any temporary liquidity does not help. It is not a good use of cash. Paying back debt may be a better use of cash.

johnhemming wrote:

GoSeigen wrote:JH: How are buybacks at high prices a problem? If you judge the price is high you have already sold, and the buybacks have no effect on you; at a minimum they offer additional liquidity for you to sell into...

It depends really on the timescales during which you hold the stock. I am not a buy and forget holder, but I may hold more than a year and hence any temporary liquidity does not help. It is not a good use of cash. Paying back debt may be a better use of cash.

I still don't understand this. You would hold for a year after announcement of buybacks why? The price is high (your own assessment), your fellow shareholders have approved the buybacks, they are happening. They only reason to hold for another year is that prices will be higher, but this either contradicts the earlier statement or it shows you to be a fool waiting for a greater fool.

So I'm confused...

GS

simoan wrote:

GoSeigen wrote:

simoan wrote:I'm no expert on bank balance sheets (who is?)

Me?

but since a significant percentage of the assets on the balance sheet are customer loans and the book value is the difference between two very large numbers, it will not take much loan impairment percentage wise to wipe out the current discount to book value.

Okay, opinion is one thing and saying you don't really know is at least honest. Really though, it's not hard to discover that most of the loans on banks' balance sheets are UK mortgages originated in the period to roughly 2008. These are NOT non-recourse loans like in the USA. They are backed by security which is mostly standard residential property. The value of the security is almost double the outstanding value of the loans.

So I don't know if you understand the implication of what you wrote above, but you were implying that in your opinion, a large number of customers are going to default on their mortgage payments AND they are going to have their properties repossessed AND the banks will be unable to sell them above 50% of their current value. AND the 5% just saved in dividends will get used up too.

But even if all the above calamity happens, that's only a 10% hit to the banks' earning power on their historical portfolios, they will be writing very profitable new business with house prices less than half their current value over the next 20 years, so the effect on their business going forward should be minimal IMO. To me, current pricing of UK bank shares is an anomaly and so I have been buying.

Having said that it's probably safer to go with Dod's assessment of my stupidity. Better to go with your doomsday scenario and stick to cash, and clear up when the disaster has struck.

GS

So you're talking your own book. It's not just me though, is it? Institutions that analyse banks much more closely than any of us here must feel the same or the share price wouldn't be where it is.

So do you think that bank share prices are high, or that instos are the dumb money? If the latter why do you pay any attention to their opinion? If the former, okay, I guess wait for them to get lower.

The only explanation is that the market feels that the discount to book value is merited due to a question mark over potential asset impairments, otherwise they'd be filling their boots. No-one has to own shares in banks and I only do so through the FTSE100 ETF I bought in March and April as a blunt instrument for feeling the index was oversold. Even though I'm a contrarian at heart I have no interest in owning bank equity outside of a collective investment.

Aye, the market might feel that, but is it right???? Who is buying at these prices and who is selling? That is the question. You've partly answered it by saying "institutions would be filling their boots", but in my assessment, they can't fill their boots, they have do be diversified, so they might fill the toes of their boots, but I wonder how you even know what their allocation approach is currently wrt the banks? Is there published information?

GS
EDIT: Just as a single data point, Littlewood at Artemis who is one of the smartest equity investors out there has LLOY as one of his top ten holdings at 3.8%.

GoSeigen wrote: The price is high (your own assessment), your fellow shareholders have approved the buybacks, they are happening.

The price is high compared to the net asset value - not necessarily compared to the inherent value of the company.

johnhemming wrote:

GoSeigen wrote: The price is high (your own assessment), your fellow shareholders have approved the buybacks, they are happening.

The price is high compared to the net asset value - not necessarily compared to the inherent value of the company.

Okay, so the price undervalues the company, but you are criticising the board for buying shares, even though you are happy to hold yourself on this basis?

GS