Why a Notoriously Outspoken Analyst Just Gave Big Banks Some Love

In this segment from the Motley Fool Money radio show, host Chris Hill, Supernova and Million Dollar Portfolio's Matt Argersinger, Total Income's Ron Gross, and Motley Fool Pro and Options' Jeff Fischer discuss what it means that much-followed analyst Mike Mayo (now employed by Wells Fargo) is asserting that banks have their financial houses in such good order. The empirical evidence from recent stress tests would seem to support the idea that they are now safe. But while a stable banking sector may be good for the economy, it may not be the best place to find profitable stocks.

A full transcript follows the video.

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This video was recorded on Sept. 15, 2017.

Chris Hill: Over the past 15 years, few analysts have been as tough on the big banks as Mike Mayo, which is why a few eyebrows were raised this week when Mike Mayo proclaimed that, "U.S. banks have the strongest balance sheets in a generation." Do you agree with that, Ron?

Ron Gross: I don't want to! Because banks scare me. But I think I have to. I think the data bears that out. If you recall, back in June, they had these stress tests that they perform on banks, all 34 of our institutions passed, including the big boys, and that hasn't always been the case. They have a new measure that they have to beat, which is called a supplementary leverage ratio, which makes sure they can handle off-balance-sheet exposure as well, which is something that has always scared me. The banks will tell you that's it's too constraining that they have to beat those kinds of measures, and it hurts their competitive nature, but I think we learned in 2008 that some of those things are necessary. So, the Fed also recently said they could pay dividends and buy back stock as well as a result of the strength of their balance sheets. So, all indications are good. It bolsters the argument for some deregulation perhaps being OK. I know Trump certainly wants to push that through. I caution, it's a slippery slope, let's just be careful.

Matt Argersinger: Yeah, I recently did a screen of most major banks in the U.S., and it's quite astounding, the average equity-to-assets ratio is a way of showing the safety of a bank, and it's over 13. Normal previous average cycles, that's in the single digits, like five, six, seven, that's considered a good equity-to-assets ratio. It's 13. And the average non-performing loans percentage of total assets, 0.5%. So, it's tiny. Banks are about as safe as they've ever been. Whether or not they're good investments, I can't tell you that.

Gross: That's interesting, because they're only up about 3% this year in the aggregate, versus the market, which is 11% or so. So, underperforming, and yet it would appear to be the right time if you want to get in.

Jeff Fischer: Yeah, it speaks to the fact that they don't really see that many places to lend money out to earn good returns. So, they have strong balance sheets, but --

Argersinger: Nowhere to go.

Fischer: Yeah.

Argersinger: Good point.

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