Business Description:
Massive increase in deposits YoY mostly from Increase in Federal Reserve System balance sheet
Increase in net income from release of reserves for credit losses of $2.1 billion in 2Q21 and economic recovery
Catalysts:
Economic recovery in the US and around the World
Rising interest rates
More release of credit losses → do not contribute to actual growth, only paper growth
Increased dividends and share buybacks
Risks:
Zero interest rates, QE and banking regulations (Dodd-Frank Act of 2011) makes makes it harder for banks to do business
Financial Analysis:
Valuations
My personal Biases
5.5% of my portfolio, buying since 2016
Likes management
Assumptions
Net income of $52.5 Billion for FY21 with further release of credit losses and economic recovery
Net income falls to $40 Billion in FY22, increasing by 4% annually
Discount Rate of 10% for the next 5 years
Terminal Growth rate of 2%
Exit Multiples Analysis
Based on Tangible Book value in 2025
2% annual increase in book value for base case (2.3% in last 5 years)
2.3% for bull case and 1.8% for bear case
4% of tangible book value paid in dividends every year (average for last 5 years)
15% of shares outstanding bought back over next 5 years in base case, 20% in bull case and 10% in bear case
Price to Tangible book value per share ranged from 1.2 to 2.3 in last 5 years, currently at 2.3, expected to rise if interest rates rises
Conclusion
Stock undervalued but future returns not expected to be much at current price
Good hedge against rising interest rates
Good stock to hold long-term
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