Dan Loeb is getting too bullish on banks. In his latest letter to investors in Third Point, the high-profile hedge-fund manager argues that a combination of rate hikes and operating leverage will jack up returns for U.S. lenders and investment banks before any tax cuts or regulation take effect.
Yet Loeb makes some feisty assumptions to arrive at his belief that returns on equity could increase over the next two years by between two and 4.5 percentage points. At the high end of the range, that means JPMorgan and Goldman Sachs could be cranking out returns on equity of around 15 percent, while even laggards like Bank of America and Citigroup would finally cover their cost of capital, at around 10 percent.
He's right that banks have spare lending capacity: the industry has lent out just 79 percent of its deposits, according to data last month from the Federal Reserve. The country's largest bank by market value, JPMorgan, has a loans-to-deposits ratio at just 65 percent. That's a lot of lending firepower that could be more profitably deployed.