Monday, August 22, 2011

Korea loves Bank of America, America loves Goldman Sachs – and everyone is quite wrong

Korea plays it safe, avoids risky US debt.  Korea Investment Corp (KIC) just invested $78 million more into BAC (Bank of America), I assume they were trying to cost-average their loses after losing 50% on investments made earlier in the year.

What a smart move, after all Bank of America is too big to fail... Worst case scenario: some other US bank buys of BAC at some ridiculous price (say $7 a share would be a pretty good premium on their currently worth).

However, the downturn of Bank of America is not my primary concern. I am more interested in why KIC is so in love with BAC - Well its simple: the KIC-BAC (sound it out) love affair.  Korea needs investment capital, strong banking relationships, and US interest to support its continued growth.

Why KIC may not be making a fortune anytime soon off of BAC, they are preparing for business. KIC will likely utilize its closeness with BAC, and its other overseas investments to spur economic activity at home. Giving the Korean economy an excellent 1-2 punch for strong growth despite a rocky global economy.

This is just one of the many reasons I like the investment potential in Korea.

Getting back to an earlier point, when BAC goes under (not saying that they will) who is going to buy there shares? Well the most practical question is who has the most capital? And while I think Steve Jobs would make a fine banking executive, and online banking would be more secure, faster, easier, and end-use friendly if it were run by Apple - I think we need to look at more practical companies:

Goldman Sachs?, JPMorgan?, Citi?, Wells Fargo?, Royal Bank of Scotland?

Well if you ask investors GS current 10.5 PE outpaces JPM & C who are both in the 7's and WFC who is in the 8's. What does this say about Goldman? Well to be fair and honest... GS does slightly different banking than all of those Super-Regionals that get bogged down in Consumer lending and customer support hotlines. And because banking with businesses is less risky, more profitable, and more sustainable.

But if that is the case then why does UBS, Credit Suisse, and Barclays both only have PEs in the 7's and 8's. Well because they are too close to the European Union and that is risky too.

Okay well then why does Jefferies and Deutsche Bank have PEs in the 11 and 12's? It's obvious. We are pricing banks on a new model.  First, we are banking on the likelyhood that BAC will spin off its investment banking division like Motorola did as it was fading, in hopes that someone will pick up the healthy parts.

Well BAC's investment banking arm may be the only good thing it has going for it, thus we are pricing banks on there ability to acquire BAC's spinoff. This can be the only possible explanation.

Well Jefferies and Deutsche Bank have a good chance at making some sort of move to acquire BAC or atleast grow in the BAC's demise. But does GS really have growth potential, do they have the same reputation they once did, and can they still rule wall street? GS is not gold - they need to quit being valued like they are gold.

GS is about as worthless as other banks right now, they have as much risk on their plates, and in the event of an economic downturn they will struggle just as much. At least BAC is trying to run a little bit leaner. 

If you want my take on the banking industry: stay out of it when investing.  The hurricane season has just begun, and the worst of the waters are still ahead. The industry will never change, it will never have a creative idea (like spinning off good banking arms), it will never become efficient, and it will never be worth what investors value the companies at. 

Banks may be too big to fail, but their never too big to be failures.

1 comment:

  1. BAC spin off valuable assets live investment banking? That's nuts.

    Instead, it'll hold the course, litigate all claims over many years. In the interim, billions in annual earnings will strengthen its balance sheet, as well asset sales.

    With so much cash on its balance sheet, $500BB+ cash/equivalents, liquidity is obviously not a problem.

    Bove is right.