June 18, 2024 | Premium Service | A couple of readers have asked us to look at Bank of Montreal (BMO) since they closed the acquisition of Bank of the West from BNP Paribas (BNP) in Q1 2023. BMO ranked 52nd in the WGA Bank Top 100 in Q2 2024. As the financials slowly give up ground from the May 2024 highs, the WGA Bank Top 25 is still up 8.5% YTD through yesterday's close vs 5% for Invesco KBW Bank ETF (KBWB).
Before we delve into the mess at BMO, however, we wanted to highlight two discussions of note from last week. The first was a conversation with Bill Bymel of First Lien Capital. We were joined by Ocwen Financial founder Bill Erbey and Bill Moreland from BankRegData to talk about the outlook for credit in the mortgage industry. That’s right, three guys named Bill and Chris.
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Note that during the discussion, Moreland talks about the burgeoning commercial real estate (CRE) exposure at Bank of America (BAC) and Wells Fargo (WFC), CRE is not a small bank problem. Neither one of these banks is adequately reserved compared with their peers, meaning that more of future income will be put aside to cover losses. The black line in the chart below is the Peer Group 1 average of loss provisions vs loans. BAC is in red.
BAC vs Peers | Q1 2024
Source: FDIC/BankRegData
Second, we joined Yahoo Finance later in the week to talk about the banking sector and where to deploy capital. Of note, we sold our common equity stakes in Wells Fargo (WFC) and U.S. Bancorp (USB) on the premise that we’ll be able to re-enter these names after the storm blows over in commercial real estate. Below we spoke with Zacks Investment Management Client Portfolio Manager Brian Mulberry and Josh Lypton on Market Domination.
Of note, Bank OZK (OZK) and Related Fund Management just inked $668 million in construction financing for the planned Waldorf Astoria Hotel & Residences in downtown Miami, reports The Real Deal, marking the largest ever condo construction loan in Florida.
Note please media peeps that this is construction finance, not a commercial mortgage. No matter what the fundamentals may say about a given bank, the financial media are going to paint this sector with a very broad brush. Control your natural disappointment.
A considerable dichotomy persists between the 100% loss severity rates in the commercial sector and the very low loss rates in residential mortgages, basically zero for bank-owned loans due to high home prices. Will this continue in Q2 2024? Yes and this situation will persist until home prices begin to weaken.
Just because home price inflation due to the Fed is keeping visible credit costs low for 1-4s, consumers are being kicked around pretty badly today. More than 80% of residential mortgage payoffs are sales today vs 80% refinance in 2021. A tough economy is forcing Americans to sell their homes.