Anger, sadness: The 'Inside Out' of bank stocks

The new animated movie "Inside Out" portrays the life of an 11-year-old girl through characters that represent the emotions inside her brain. Bank analysts, like the girl, handle sadness, disgust, fear, and anger but can still experience joy, despite the drama in their coverage universe. With a nod to the folks at Pixar, consider my roller-coaster ride of emotions below, based on the film's characters:

Sadness: "The U.S. bank-stock index (BKX) was at this level as far back as 1998. You could have skipped purchasing banks for almost two decades and still wound up ahead. OK, OK. Some banks like Wells Fargo reached all-time highs, but this only makes me sadder to realize how many others did not while the S&P 500 has set many new highs. If I invested in Citi or Bank of America, I would probably never get back to where I started. That makes me so sad."

Joy from the movie "Inside Out."
Source: Disney
Joy from the movie "Inside Out."

Disgust: "Can there be more Monday-morning quarterbacking? Bankers blame borrowers and regulators. Borrowers blame banks and crony capitalism. On and on — the blame game! Where were these geniuses before this all happened? Bankers used far too much leverage. Regulators and legislators relaxed regulations for 20 years leading up to the crisis but nobody wants to own up! Since 2009, regulators have fined banks over $250 billion, but this typically only punishes investors versus those who are actually accountable. Totally disgusting. To boot, many complain about the size of banks when actions taken by overseers more fully entrench the largest banks through barriers created by the enhanced regulatory and compliance maze. How can I not be disgusted?"

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Anger: "Money, power, and votes. That's what this is all about. Incentives drive bad behavior and these incentives have not changed. For politicians, it is en vogue to bash the banks to gain votes. If you need votes, what's the easiest thing to do? Bash the banks. For banks, it's high time to disclose more of that opaque information and listen to investors more. Who holds the banks' boards accountable? Some CEOs and top executives continue to get paid disproportionately to their performance. You mess up, you still get paid. What is this? Money, power, and votes. Little has changed and that makes me angry."

Fear: "Sometimes I get so worried that these regulators are overdoing it. When will regulators be done with all of the new rules? My fear is that, while these rules keep piling up, we'll wind up with a less spirited, less effective system. As a consequence, banks can be tempted to stretch for growth. For example, loans typically grow six times faster in an economic expansion and revenues follow. However, during this decade, revenue growth is the worst we have seen since the time of the Great Depression. If and when banks stretch for growth, mistakes are made with sometimes systemic consequences."

Joy: "Ahh. Cheer up. It could be worse." As a bank analyst, I take comfort that industry-defect rates (loan losses) are typically one out of 100. While they reached three out of 100 during the crisis, the ratios are actually worse when talking about life-threatening situations like injuries in Formula One racing (four out of 100), NFL concussions (10 out of 100), and mold in cranberry sauce (15 out of 100). The banks are, in general, more resilient today with stronger balance sheets than in a couple decades. Indeed, banks are on pace — within about five years — to have enough excess cushion to write off another theoretical housing crisis. And the industry would still have more capital than it had BEFORE the last crisis. This means that the chances of massive bank bailouts of the type from the last crisis are quite remote. Yes, there are threats from crisis, technology, regulation, and competition. Yet, banking has been one of the most efficient ways to allocate scarce resources for thousands of years. We aren't going anywhere. And that makes me happy!"

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Earnings season: Fear and joy

During earnings season, which is coming up, my emotions are mostly in check. I am a little fearful that investors expect too much from higher rates, but I'm also joyful at the expectation of improved earnings consistency ahead given banks' improved risk profile.

Commentary by Mike Mayo, a banking analyst and managing director with CLSA, a global boutique brokerage firm, and author of the book "Exile on Wall Street: One Analyst's Fight to Save the Big Banks From Themselves" (John Wiley & Sons, 2011).

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