Bank Observations After the Big Moves

Updating the P/TBV vs. ROTCE Scatter

Let's be rational about what happened yesterday. Bank stocks jumped 10% on Trump's win. Why? Because humans (or rather hedge funds and trading programs) tend to act first and think later, especially when money is involved.

Here's the simple truth: The market is betting that Trump will cut taxes and strip away regulations. If he does, banks could see 5-10% higher earnings per share next year. But remember – nothing has actually changed yet. This is all anticipation, not reality.

It's worth understanding the psychology at work here. The market, in its typical fashion, is showing what Ben Graham called "voting machine" behavior rather than "weighing machine" behavior. Traders aren't waiting for actual policy changes – they're betting on promises.

Expectations right now are flying. Some will come true. Some won’t.

Some banks will perform well. Some won’t.

Remember, in the long run the weighing machine matters.

To hit on this point about the short-term voting machine, consider how drastically market perception has shifted: Today, a bank earning 10% return on tangible common equity (ROTCE) trades at 160-170% of book value. During the crisis, that same return barely got you book value. What changed? Not the fundamental business of banking – just how much people are willing to pay for it. And soon that will manifest itself with a bunch of “non-native” bank people looking at banks beating the SPY and QQQ for the year, noticing the price momentum, and hearing a sound byte on CNBC and saying to themselves, “man I should really buy banks now”. Funny innit? They should’ve been buying when P/E multiples were 5 turns lower, but I guess that’s been the case since the beginning of time.

Here are some observations, some thoughts, and some which banks are trading expensive, and some others which are trading cheap. You’ll note the correlation isn’t that strong, which happens during big moves. You can disregard if you want, I don’t.

The bigger picture landscape or ROTCE vs. TBV looks something like this …