Fear of a banking crisis keeps spreading as America’s second-largest bank, Bank of America (BAC) keeps growing.
Frighteningly, a banking trade journal, International Banker, asks if a “full-blown 2008-style banking crisis is just around the corner?” John Manning asks this question because First Republic Bank collapsed on 1 May 2023. First Republic was the 14th largest bank in the United States with $229 billion in total assets and $104 billion in deposits. Tellingly, they sold First Republic’s assets and deposits to America’s largest bank, JPMorgan Chase (JPM).*
Two other large institutions, Silicon Valley Bank and Signature Bank, collapsed in early March. Skeptics will note that First Republic, Silicon Valley, and Signature were fringe institutions that specialize in loaning money to unstable and experimental businesses. For example, First Republic loaned to the tech companies while Signature specialized in cryptocurrency loans.
Hence, there are bank collapses but no banking crisis. Why? One reason there is no US banking crisis is that monster banks are gobbling up US banking.
For example, Bank of America’s revenues grew by 64.83% in the quarter ending on 31 March 2023. Significantly, that growth came in the same quarter as the Silicon Valley and Signature Bank collapses.
Notably, Bank of America’s quarterly revenue grew from $24.55 billion on 31 March 2022 to $40.465 billion on 31 March 2023. Moreover, Bank of America’s cash and short-term investments grew from $895.087 billion on 31 March 2022 to $1.001 trillion on 31 March 2023.
Conversely, Bank of America’s total assets fell slightly from $3.238 trillion on 31 March 2022 to $3.195 trillion on 31 March 2023. Yet, Bank of America has more of the most asset of all cash.
Cynics will say Bank of America management is stocking up on cash so they will have money to buy collapsing banks. Thus, Bank of America is healthier despite the banking crisis fears.
Hence, there is a banking crisis, but it is not at Bank of America. Instead, the monster bank has more cash and buying power than ever before. Thus, there is not banking crisis because banking is getting concentrated in a few large institutions.
People who fear banks will note that Bank of America’s total debts grew from $525.754 billion on 31 March 2022 to $654.599 billion on 31 March 2023.
Bank of America (NYSE: BAC) is making more money. For example. Its gross profit rose from $23.228 billion on 31 March 2022 to $26.258 billion on 31 March 2023.
Similarly, Bank of America’s quarterly operating income grew from $7.879 billion on 31 March 2022 to $9.089 billion on 31 March 2023. In contrast, Bank of America’s quarterly operating cash flow “grew” from -$45.43 billion on 31 March 2022 to -$11.3 billion on 31 March 2023.
Conversely, Bank of America’s quarterly financing cash flow grew from $40.886 billion on 31 March 2022 to $126.121 billion on 31 March 2023. Meanwhile, the quarterly investing cash flow rose from -$68.408 billion on 31 March 2022 to $30.846 billion 31 March 2023.
Finally, Bank of America’s quarterly ending cash flow grew from $273.934 billion on 31 March 2022 to $376.218 billion on 31 March 2023. Thus, Bank of America generates more cash which justifies its monster bank business model.
Bank of America’s financial numbers show monster Banks are cash rich and profitable. However, the most important observer Mr. Market has doubts about Monster banks.
For example, Mr. Market paid $32.60 for BAC shares on 22 June 2022 and $27.75 on 23 June 2023. Hence, Mr. Market shares some of the bank crisis fears.
This scares me because irrational fears spark banking crises. To explain, in a bank run or crisis people pull out of a bank because they fear it could collapse. A crisis can destroy a healthy bank because the fears are irrational. People see one person pulling money out and start wondering if something is wrong.
Federal officials nationalized Silicon Valley Bank and sold it to prevent a crisis. Similarly, JPMorgan Chase bought First Republic’s assets to prevent a bank run.
Hence, Mr. Market and others are afraid of a banking crisis and the US banking system. One reason for this, is the collapse of portions of the US economy such as commercial real estate and regional economic problems in parts of the country.
Some patriots will say the United States needs monster banks to compete with China’s monster banks.
Four Chinese banks have assets of $19.6 trillion. This exceeds China’s 2022 Gross Domestic Product of $18.1 trillion.* In contrast, the US Gross Domestic Product (GDP) was $26.486 trillion in the first quarter of 2023.
Moreover, both banks with assets over $5 trillion and all the banks with more than $4 trillion in assets are Chinese. In comparison, the two largest US banks Citibank (C), JPMorgan Chase (JPM) and Bank of America (BAC) had combined assets of $9.14 trillion. Statista estimates JPMorgan had assets of $3.67 trillion, Bank of America had assets of $3.05 trillion, and Citigroup had assets of $2.42 trillion in 2022.*
Statista estimates the four largest banks in December 2022 were:
- The Industrial & Commercial Bank of China Ltd with $5.47 trillion in assets.
- The China Construction Bank Corporation with $5.02 trillion in assets.
- The Agricultural Bank of China with $4.92 trillion in assets.
- The Bank of China with $4.19 trillion in assets.*
There is an enormous concentration of financial power in China. This financial power gives Chinese banks and the Chinese government enormous leverage over other nations including the United States.
For example, Chinese banks now have the money to buy any US bank and to bail out US banks in a crisis. Moreover, I think there is no way to keep Chinese money and banks out of the US.
If American entrepreneurs cannot get the credit, they need in the USA. They will find a way to bring Chinese credit to America.
Notably, all four the largest Chinese monster banks are already here in the USA. In 2019, the Industrial and Commercial Bank of China had 13 US branches, mostly in Los Angeles.*
The Bank of China had four branches in New York, Chicago, and LA. The Agricultural Bank of China and the China Construction Bank had branches in New York City.* Hence, the Chinese monster banks are here and their services are available to Americans.
Cynics will say the Chinese monster banks can hire lobbyists, make campaign donations, and start pressing Congress for a greater role in the US economy. It is easy to imagine US politicians selling out to Chinese banks. After all those people are already selling out average Americans.
Moreover, US politicians’ willingness to block Chinese credit could evaporate if American businesses need that Chinese credit to meet payroll. If voters’ jobs are at risk, I predict the federal government will let US businesses and governments borrow money from Chinese monster banks.
Worse, what happens if the only institution willing to buy a failing US bank and prevent a regional banking crisis is a Chinese monster bank? Will US officials tell people “sorry you can’t have a bank in your town because we don’t want a Chinese bank here?”
Many people will wonder if Bank of America (BAC) is a value investment. I say yes, because BAC shares are cheap yet it had $1.001 trillion in cash on 31 March 2023.
Many people will wonder if Bank of America (BAC) is a value investment. I say yes, because BAC shares are cheap yet it had $1.001 trillion in cash on 31 March 2023.
Finally, I think monster banks such as B of A are an excellent hedge against an economic downturn. Stock investors need to investigate monster banks because evidence shows these institutions are resistant to economic downturns and banking crises.
*https://www.statista.com/statistics/269845/largest-banks-in-the-world-by-total-assets/
*https://www.statista.com/statistics/263770/gross-domestic-product-gdp-of-china/
*https://www.real-time-cny.com/country/usa.html
