I’m allergic to annual report readings because their spin is overly promotional and bushy tailed. Proxy statements are my meat because they must divulge fully the several levels of management’s self-largesse. Proxy reports get rendered, traditionally, in ultra small-sized print, obviously designed by the house’s lawyers to discourage perusal.
Up front, you find the headman’s message, but it’s the last thing to read. Like a Talmudic scholar, I start at the back end where you find revealing footnotes. For example, operating cash flow was sharply diminished, year-over-year but the bank was able to buy back some common and preferred stock outstanding. It did reduce its retirement, net of long-term debt. After all, 2020 was an off year for bank earnings compared with 2019, a pre-Covid setting.
Interestingly, total non-interest income held steady past several years. Variance in net income largely was a function of credit losses and diminished spreads in 2020’s net interest margins. This year the shoe should be on the other foot. Diminished credit losses and a widening spread in net interest margins.
The investment question is how long can the good times last? My answer is several years of post Covid-19 recovery. I’m overweighted in banks, more than Buffett’s 23% of portfolio segmentation. The upward press of interest rates is all you need to believe in.
Bank of America’s detailed results are printed on page 190 with comparisons covering 2019 and 2018. But, this isn’t the Bank of America I got involved with in 2009, at the bottom of the 2008 - ’09 financial meltdown. Mid-2009, I bought B of A’s preferred stock at $5 a share down from its $25 par value.
The bank offered Buffett billions in preferred stock options in exchange for a dollar transfusion that kept them alive. Merrill Lynch, after foolishly writing and trading sub-prime mortgage paper was merged in when the bank was trading in low single digits.
Conveniently, B of A’s opening page captures some of the bank’s dramatic results, but doesn’t deal with 2008 - ’09. This is known as showing your best foot forward. And yet, quarterly net income of $5.5 billion compared with $3.2 billion in 2010. Not exactly a home run, but a single.
Nearly a hundred pages of this annual report is taken up with how the bank serves clients and communities. But shareholders shouldn’t have to wade through such public relations ballast. Neither should we be subjected to what a great workplace the bank affords for women and minorities. This should be a given, not a PR hymn.
I found table 37 on page 90, in miniscule print size that detailed credit exposure by industry on a trillion dollars of commitments. Two biggest categories, asset managers and real estate comprise 20% of outstanding commitments with finance companies a solid fourth, at $70 billion.
So, B of A is no longer just mainly for farmers and single-family home mortgagors. Maybe, early postwar years, but not today. There’s no reason to be insular if you thirst to grow. I like the table on country exposures, too. United Kingdom and Germany account for nearly 40% of exposure. I don’t worry too much about Mexico or Italy imploding.
All in, banks like JPMorgan Chase, Citigroup and Bank of America are complex machines that are overly technocratic. All this gets reflected in their discounted valuation to the market. Banks did stupid things in 2008 - ’09 and practically buried themselves. There’s no hint of all this in Bank of America’s longish annual report. Conveniently, the charts and tables cut off 10 years ago, 2010, when recovery began to set in.
Starting with its cover of a black mother holding her child, B of A’s annual is a public relations creation. No report should run more than 40 pages even if you’ve got a lot of explaining to do. In the financial meltdown B of A collapsed to $5 bucks from $50. Today, it has regained some premium over book value.
Martin Sosnoff and/or his managed accounts own: Bank of America, Citigroup and JPMorgan Chase.
Disclosure: I am/we are long JPM.
Additional disclosure: Martin Sosnoff and/or his managed accounts own: Bank of America, Citigroup and JPMorgan Chase.