Bonnie Baha: The Big Banks Look Like Legacy Airlines

“Deleveraging, though necessary, is not a business model.”

The big bank stocks rallied hard to start the year off, but it looked and felt like the ultimate sucker’s rally and indeed it has already begun to unwind.  Other than a small position in JPMorgan and some indirect ownership through Berkshire Hathaway, I don’t want anything to do with the big bank stocks.  I have no idea how they’ll ever get into a growth phase again.

One of the smartest things you’ll read all day is this take on why the Big 6 aka the Systemic Six banks look like legacy airlines these days.  It comes to us from DoubleLine corporate bond portfolio manager Bonnie Baha…

To my way of thinking, the big banks share a common problem with their old-line counterparts in the airline industry. Like the legacy air carriers, the top banks in this country have yet to find a sustainable profit-making model in a changed world.

Consider the latest round of quarterly results. Earnings quality was mixed at best. Profit “growth” at Bank of America, for example, was primarily fueled by asset sales and reserve releases – one-time events unlikely to be repeated. Even JPMorgan Chase found it necessary to refer to the banking industry’s “malaise” when discussing the decline in pre-provision profits. A bird’s-eye view of the structural issues looming on the horizon makes me feel like a white-knuckle flier. I don’t want to get on the big-bank plane.

Like the legacy carriers, the big banks have been slow to adapt to the new order. Pan Am exemplified what commercial flying used to mean: glamour, comfort and a free hot meal. Then came the 1973 oil crisis. Fleet overcapacity and embedded cost structures conspired with the new reality of oil price-fixing by OPEC to turn Pan Am into a money pit. Corporate consolidations and capacity reductions ensued, but Pan Am never returned to solid profit growth.

Keep reading:

Big Banks Lack Convincing Business Model (American Banker)

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