Quote from Dick Bove on CNBC June 26, 2009:
"In the 1st quarter of this year the 8426 banks in the US generated $ 80 billion in pre-tax cash profit.
That was the highest number that this industry has generated ever."
Doesn't get much coverage. The current cash earning power of banks right now is extremely strong.
There will be large write-offs for the banks over the next couple of years but the system continues to have significant capacity to absorb those write-offs and build capital through earnings over time.
During a downturn, the short run earnings are often understated while banks are booking loan loss provisions (a non-cash expense required by GAAP*) to build reserves in anticipation of future losses. Non-cash expenses in GAAP cause all kinds of short-term distortions. Interpreting what they mean and understanding the inherent limits of accounting is key.
For any bank, it comes down to asset quality and cash earnings. A bank with the lowest cost deposits has a huge advantage in the long run. Current GAAP earnings do not tell you very much about the dynamics of a bank.
Where investing in banks gets tricky is when they are required by regulators to raise capital to meet capital requirements when the stock price happens to be low. When this happens, it may not make sense (or even be fair) economically but as Clint said in Unforgiven: "Deserves got nothing to do with it."
Fair or not, the dilution still has a very real negative impact on investor returns.
A lot of pain lies ahead for the banks, but the survivors should turn into great long-term investments. If you buy a high quality bank now and ride out the storm, it is likely to do much better than the market over the next 10 years...even if some dilution occurs.
*Generally Accepted Accounting Principles