Barron\'s - April 6 2020

April 6, 2020 BARRON’S 11

N

othing says New York more than

finance—or, going back a decade or

so, a financial crisis. But this time,

New York finance may be better

prepared to weather the storm than ever

before.

New York City is reeling from the

Covid-19 coronavirus pandemic, and its

financial institutions aren’t out of the

woods. The city is home to 50 S&P 500

companies, and half of those are banks,

insurance companies, and the like. New

York banking stocks are down about 40%

this year, worse than the drop in the Dow

Jones Industrial Average, with JPMorgan

Chase (ticker: JPM), Citigroup (C), Gold-

man Sachs (GS), and Morgan Stanley

(MS) among some of the hardest hit.

But New York has weathered crises

before, from the dot-com bust and 9/11 to

the financial crisis. Covid-19 isn’t a finan-

cial crisis—and this time its banks are part

of the solution, not the problem. They’re

the conduits by which billions of dollars

will be funneled to small businesses across

America. And while they’ll feel the pres-

sure of an almost-certain recession, they’re

also stronger than they have been in years.

The knee-jerk reaction to sell financial

stocks in a downturn might have created

opportunity for investors.

To be sure, tough times lie ahead for

U.S. banks—just as they do for everyone. A

recession is never a good time to make

loans, while some old loans can, and will,

go bad. Ultralow interest rates hurt busi-

nesses that make money on the spread

between borrowing and lending costs.

Some New York banks such as Goldman

Sachs and Morgan Stanley are more heav-

ily dependent on capital-markets busi-

nesses such as mergers and acquisitions,

which typically falter when companies are

thinking more about cutting costs and

paying down debt.

But this isn’t 9/11, when the New York

Stock Exchange was closed for four days.

Now traders are doing their jobs from

home. “We got full home workstations

about three weeks ago,” one veteran trader

tells Barron’s.

And New York finance is still humming.

Finance-related jobs make up about 12% of

total employment in New York City, ac-

cording to New York state reports. But that

understates the impact the sector has on

the region. While health, education, and

professional services account for the ma-

jority of jobs, many exist because of bank-

ing. High finance remains one of the main

economic engines of the region.

Credit quality is much higher than dur-

ing the financial crisis. There are far fewer

subprime loans. And the regulatory re-

gime has been completely retooled.

Consumers are in far better shape than

they were heading into the last crisis.

“Coming into 2007, we had the highest

household debt-service ratio in history,”

Smead Capital Management portfolio man-

ager Cole Smead tells Barron’s. “We en-

tered this with the lowest household debt-

service ratio since 1981, and a positive

savings rate.”

New York’s banks have other things

going for them. With interest rates at rock-

bottom levels, mortgage refinancing is

booming. The federal government in the $

trillion stimulus package is helping indi-

viduals who are losing jobs, but it’s also

supporting small businesses, offering to

make—and forgive—loans, if money is

used for approved purposes. Baird analyst

David George called the program

“thoughtful” and a “solid option for lend-

ers to engage with small business.” George

is bullish on bank stocks.

Banks are also far better capitalized

than they were in the past and are sub-

jected to regular stress tests designed to

ensure they can make it through the

toughest times. Going into the financial

crisis, large U.S. banks had about $7 for

every $100 in assets, while large New York

banks had just $5. Today, they have $10 for

every $100 in assets. That’s a bigger cush-

ion to absorb losses in hard times.

Little of that is reflected in bank valua-

tions. Large New York banks trade for

about seven times estimated 2020 earn-

ings. Other banks trade for about eight

times. JPMorgan trades at 1.38 times tangi-

ble book, Morgan Stanley at 0.83 times,

Goldman Sachs at 0.68 times, and Citi-

group at just 0.53.

For the daring, they might just be cheap

enough to buy.B

ToughTimesAre

Ahead,butNew

York’sBanksAre

StrongerNow

Big banks are in much better shape

than they were a decade ago. And

steep declines in their shares make

this a time to buy for daring investors.

By AL ROOT

• Jim Cullen, Chairman & CEO

For further information, please contact Schafer Cullen Capital Management

212.644.1800 • [email protected] • schafer-cullen.com

Schafer Cullen Capital Management is an independent investment advisor registered under the Investment

Advisers Act of 1940. This information should not be used as the primary basis for any investment decision

nor, should it be construed as advice to meet a particular investment need. It should not be assumed that any

security transaction, holding or sector discussed has been orwill be profitable, or that future recommendations

or decisions we make will be profitable or equal the investment performance discussed herein. A list of all

recommendations made by the Adviser in this strategy is available upon request for the 12 months prior to the

date of this report.

High Dividend Value Equity

Enhanced Equity Income

Value Equity

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“Invest for the long term and

be disciplined about price.

The rest is noise.”