The Lemon Fool

simoan wrote: I'm no expert on bank balance sheets (who is?) but since a significant percentage of the assets on the balance sheet are customer loans and the book value is the difference between two very large numbers, it will not take much loan impairment percentage wise to wipe out the current discount to book value.

There are two sides to that Balance Sheet. You will get "an advantage" too in that situation as the market value of the Bank's liabilities also go down (though not by as much).

dealtn wrote:

simoan wrote: I'm no expert on bank balance sheets (who is?) but since a significant percentage of the assets on the balance sheet are customer loans and the book value is the difference between two very large numbers, it will not take much loan impairment percentage wise to wipe out the current discount to book value.

There are two sides to that Balance Sheet. You will get "an advantage" too in that situation as the market value of the Bank's liabilities also go down (though not by as much).

But most of the liabilities will be deposits, surely? As I mentioned, I have no dog in this fight and really have no interest in banking equity (I do hold prefs though) and only originally replied on this thread with reference to the OP i.e. dividends versus buybacks. I will now sling my hook as I am apparently 100% wrong and I can't deal with such certainty about the future

All the best, Si

simoan wrote:

dealtn wrote:

simoan wrote: I'm no expert on bank balance sheets (who is?) but since a significant percentage of the assets on the balance sheet are customer loans and the book value is the difference between two very large numbers, it will not take much loan impairment percentage wise to wipe out the current discount to book value.

There are two sides to that Balance Sheet. You will get "an advantage" too in that situation as the market value of the Bank's liabilities also go down (though not by as much).

But most of the liabilities will be deposits, surely? As I mentioned, I have no dog in this fight and really have no interest in banking equity (I do hold prefs though) and only originally replied on this thread with reference to the OP i.e. dividends versus buybacks. I will now sling my hook as I am apparently 100% wrong and I can't deal with such certainty about the future

All the best, Si

Not sure who has called you 100% wrong, certainly not me.

There will be significant bonds issued by banks too. As I said it won't go down by as much, but you may well get bigger mark downs in bonds than you will on a large % of the mortgage book, for instance.

(Ex-banker and debt trader)

My view about share buy-backs is that they should always be done by tender offer to the shareholders, rather than in the market. That way, shareholders who wish to sell some or all of their holdings can do so, while those who do not can hold onto their shares.

In any case, if they wish to return cash to their shareholders they have the option of a special dividend.

Buy-backs do not benefit the shareholders, only the incentive scheme holders.

TJH

GoSeigen wrote:Okay, so the price undervalues the company, but you are criticising the board for buying shares, even though you are happy to hold yourself on this basis?

I would expect the board to have a strategy for the long term success of the company. If they buy back shares it is not that easy necessarily simply to sell them into the market. Hence they are locking up cash flow that may be better used for other purposes.

Hence I am a fan of buying back shares under certain circumstances. However, I would expect the priorities of the management to be different to mine.

tjh290633 wrote:My view about share buy-backs is that they should always be done by tender offer to the shareholders, rather than in the market. That way, shareholders who wish to sell some or all of their holdings can do so, while those who do not can hold onto their shares.

In any case, if they wish to return cash to their shareholders they have the option of a special dividend.

Tenders are too expensive for very obvious and sensible regulatory reasons. And why can shareholders not sell some or all of their holdings in the market? This is a completely mistaken premise.

Buy-backs do not benefit the shareholders, only the incentive scheme holders.

I'd recommend that anyone tempted to take this at face value read previous threads where TJH has made a similar statement and others have provided a very well reasoned rebuttal.

[My view: so what? If the shareholders are stupid and approve a buy-back not in their interest then let them be punished for their stupidity. OTOH if the shareholders are smart and approved the buyback then it must logically be in their interest to some extent, not "only" in the interest of the incentive scheme holders -- if such a scheme even exists for the company in question.]

GS

tjh290633 wrote:My view about share buy-backs is that they should always be done by tender offer to the shareholders, rather than in the market. That way, shareholders who wish to sell some or all of their holdings can do so, while those who do not can hold onto their shares.

In any case, if they wish to return cash to their shareholders they have the option of a special dividend.

Buy-backs do not benefit the shareholders, only the incentive scheme holders.

TJH

How is that different?

Those that wish to sell can, at any time in the secondary market, those that don't, well don't! Regardless of the buyer's identity, who might be the company.

Buy backs do benefit share holders. They do have the potential for mis-aligned incentives though you are right.

My view is that buybacks can benefit shareholders if done at the right price, that is, at something less than the enterprise value. They then leave continuing shareholders with a larger economic value in the company and usually a higher EPS. It also helps to shake out those shareholders who may want to sell although liquidity for our banks is surely not an issue.

Of course it may help senior execs in the bank as well if their success is measure to some extent by things like EPS.

Dod

All companies that issue shares as part of incentive schemes need to undertake some buy-backs otherwise the constant issuance of new shares is dilutive.

And what increases the EPS also increases the DPS.

What bothers me about banks is whether they can really make money over the coming years. Govt interference in their business, low interest rates, not helpful.

Do hold some [underwater] ords but as an income investor prefer the Prefs even though they probably offer capital downside now.
Perhaps, thinking about the recent post on mixing and matching asset classes, I should balance my Prefs with more Ords, to take advantage of the Ords' potential capital upside.
But I really do have too much in Financials.

V8

TJH wrote “Buy-backs do not benefit the shareholders, only the incentive scheme holders.”

All the incentive schemes I’ve been involved with included “dilution” adjustments. These worked both ways to adjust for capital changes to make sure senior execs only benefitted from genuine performance on these elements.

Best wishes,

Steve

Steveam wrote:TJH wrote “Buy-backs do not benefit the shareholders, only the incentive scheme holders.”

All the incentive schemes I’ve been involved with included “dilution” adjustments. These worked both ways to adjust for capital changes to make sure senior execs only benefitted from genuine performance on these elements.

Best wishes,

Steve

That's good to hear because all we ever hear about is the benefit to Execs and I have never understood why something could not be done about that. It sound as though the rather unattractive cynicism of many may be largely unwarranted. I would like to think so. I am sure though that some companies will ignore the required adjustments.

Dod

simoan wrote:

dealtn wrote:

simoan wrote: I'm no expert on bank balance sheets (who is?) but since a significant percentage of the assets on the balance sheet are customer loans and the book value is the difference between two very large numbers, it will not take much loan impairment percentage wise to wipe out the current discount to book value.

There are two sides to that Balance Sheet. You will get "an advantage" too in that situation as the market value of the Bank's liabilities also go down (though not by as much).

But most of the liabilities will be deposits, surely? As I mentioned, I have no dog in this fight and really have no interest in banking equity (I do hold prefs though) and only originally replied on this thread with reference to the OP i.e. dividends versus buybacks. I will now sling my hook as I am apparently 100% wrong and I can't deal with such certainty about the future

All the best, Si

Before slinging your hook, could you point to your data showing low institutional allocation to UK banks, please?

Thanks,

GS

GoSeigen wrote:
Before slinging your hook, could you point to your data showing low institutional allocation to UK banks, please?

Thanks,

GS

Where did I say that institutions were underweight banks? At least quote something I said if you're going to post with such an aggressive tone. FWIW I won't be replying to any more of your posts.

All the best, Si

simoan wrote:

GoSeigen wrote:
Before slinging your hook, could you point to your data showing low institutional allocation to UK banks, please?

Thanks,

GS

Where did I say that institutions were underweight banks? At least quote something I said if you're going to post with such an aggressive tone. FWIW I won't be replying to any more of your posts.

All the best, Si

simoan wrote:Institutions that analyse banks much more closely than any of us here must feel the same or the share price wouldn't be where it is. The only explanation is that the market feels that the discount to book value is merited due to a question mark over potential asset impairments, otherwise they'd be filling their boots.

What does this mean then? If insto's were down on banks or not filling their boots they'd be underweight wouldn't they? So I'm just wondering where we can see this positioning by institutions. IMO an investor needs to consider what the smart money is doing vs the dumb money so I very much support simoan raising this point. I'd just like to see the evidence, cos as I said, some institutional investors are quite relaxed about banks.

Best to you too, Si.

GS
P.S. What was aggressive about the above? simoan himself used the expression "slinging my hook"... Was it the terseness or use of the word "please" maybe interpreted as sarcastic?!!

Price targets are not a brilliant source of information, but they give some indication. Here are the analysts views on Lloyds (for example)
https://www.marketbeat.com/stocks/LON/L ... ce-target/

I don't read those as "SELL"