Financials Still Look Good: Part 2

Bank of America (BAC)
BAC announced earnings too, and things there are looking interesting.  Like other banks, there is a problem with NIM pressure.  But the investment bank / brokerage business seems to have done really well.

I won't go into any details here, but I just want to jot down what I was looking at.  First of all, the valuation play for BAC is similar to JPM even though I have very different views on the management of each.  I have a very high regard for JPM management, but only so-so for BAC.  These post-crisis / scandal CEO appointments tend not to work out too well over time and I can't get over the fact that this may be true in the case of BAC too.

I know Buffett has endorsed current BAC management, but I think he really sees the value of the franchise; his ownership of BAC was a bet on the cheap valuation of BAC and their competitive position and not necessarily the current management (even though he has explicitly said that the current CEO is doing the right things).

This is the part that is interesting.  In post-crisis / scandal situations, the right thing is usually pretty straight forward.  It's not easy, necessarily, but the job is to clean up the mess made by the previous management.  It doesn't take a lot of creativity, vision, or leadership skills or anything like that.  In a turnaround situation, survival is the priority so you don't need a visionary, charismatic leader.

Chuck Prince and Martin Sullivan looked good too, initially for a few years, when they were just cleaning up.  But they proved to be horrible CEOs beyond that.  I have no proof that Moynihan is any better or worse than Prince or Sullivan at this point.

Anyway, the valuation play here is simply that BAC is worth book value, or 1.5x tangible book value.  I think Moynihan has stated that BAC can earn at least 15% return on tangible book in normal times (when the current high cost of dealing with the mortgage mess settles down).

At 2012 year-end, the BPS for BAC were:

BPS:                $20.24
tangible BPS:  $13.36

It just so happens that BPS is 1.5x tangible BPS, so we get the same valuation target using 1x BPS or 1.5x tangible BPS.  With the stock price at around $11.50,  there is still pretty substantial upside.

I've looked at this from the point of view the sum of the parts, so let's take a look at the old Merrill.  It turns out that the old Merrill is doing very well.  Here are the returns on average equity (ROAE) and returns on average economic capital (ROAEC, basically return on average tangible equity) of the three business segments that is the old Merrill (even though global banking now includes more than just the former investment banking business).

Global Wealth and Investment Management
                         2011        2012
ROAE                9.9%     12.53%
ROAEC           30.52%   25.46%

Global Banking
                          2011        2012
ROAE               12.76%    12.47%
ROAEC             26.59%    27.21%

Global Markets
                           2011        2012
ROAE                4.99%      19.19%
ROAEC              6.34%      26.14%

The returns for Global Markets exclude DVA and UK tax adjustments.  So the old Merrill is looking pretty good.  Combined, I think the total ROAE comes to 14.3% which is very good.

I think it is safe to say that the these three segments, or what we call the old Merrill is worth book value.

So let's see how this breaks out.  Using average balance sheet figures for 4Q12, the allocation of equity and tangible equity to the old Merrill (combined above three segments) were as follows:

Total equity:                   $82.1 billion
Total economic capital:  $42.2 billion

There are 10.8 billion shares outstanding so BPS of the old Merrill is $7.60/BAC share.  Tangible book is $3.91/BAC share.

BAC is now trading at around $11.50, so the old BAC (pre-Merrill) is trading at $3.90/share (keep in mind, though, that some of the old BAC is now in the old Merrill; Global Banking, for example).   What do you get for $3.90/share?

For BAC as a whole, the common equity and tangible equity were:

Common equity:  $218 billion
Tangible equity:   $144 billion

Stripping out the old Merrill from above, you get:

Old BAC:
Common equity:  $136 billion
Tangible equity:   $102 billion

On a per share basis, that comes to $12.59/share in BPS and $9.44/share in tangible BPS for the old BAC (or the post-Merrill-spinoff-BAC).

So you are getting $12.59/share in book and $9.44/share in tangible book for $3.90/share!   That's a 60% discount to tangible book and 70% discount to BPS.

Pretty stunning when you look at it that way.

If the post-spin BAC is worth tangible book value and the Merrill is worth BPS, then the fair value of BAC is:

Merrill value (@BPS):                             $7.60/share
BAC ex-Merrill value at tangible book:  $9.44/share
Total value:                                             $17.04/share

That's 50% higher than the current price of around $11.50/share.  This is less than the $20/share book value for the current BAC as we don't give credit to the goodwill in the non-Merrill portion of BAC (which is goodwill from the Countrywide deal and maybe some others).   So it can be seen as conservative.

Goldman Sachs (GS)
Goldman also reported and had a double digit ROE.   It reported 16.5% annualized ROE for the 4Q2012 and 10.7% for the full year.   

BPS of GS at year-end was $144.67/share and tangible BPS was $134.06/share.  

So GS is now trading right around at book value per share ($144.50).  There has been concern that investment banks are dead, that new regulations will make it impossible for GS to make high returns again etc.

But I disagree with that.  I do feel that GS will be able to generate good returns over time. Just as a review, here is a long term look at the growth of BPS at GS:

              BPS
1999      20.94
2000      32.18
2001      36.33
2002      38.69
2003      43.6
2004      50.77
2005      57.02
2006      72.62
2007      90.43
2008      98.68
2009    117.48
2010    128.72
2011    130.31
2012    144.67

GS has increased BPS 16%/year since 1999, and importantly, BPS has increased every single year during the past decade and beyond despite the internet bubble and collapse, 9/11,  Iraq/Afghanistan, financial crisis etc.  Even since the peak of the bubble in 2007, BPS has increased at 10%/year.

Recent low ROE has been due to, according to management,  conservatism on management's part because of the uncertainties with respect to the macro environment (Europe), regulatory/capital issues (which remain unclear) and lower client activity.

If they thought there was a permanent change in the environment, they would gladly buy back large amounts of stock and return capital to shareholders.  They feel that this environment is temporary and want to hold capital so that they can deploy it when things normalize.  Viniar has said that they would love to buy back more stock but don't want to be put in a position that when things start to move, they don't have enough capital to deploy.

It's no good to take management's comments at face value, of course. But on the other hand, if you don't trust the management, then you shouldn't be in the stock (unless there are other good reasons to own the stock; asset values or potential to replace the management etc...).

I do believe that GS is being conservative.  This is very different from a company that can't earn high ROE even if it wants to and even in good environments.  There is a difference.

GS is still an attractive stock to own, though it's not a no-brainer like it was when it was under $100. 


Morgan Stanley (MS)
MS is an interesting situation.  I was never really that interested in MS except for valuation reasons.  It was just way too cheap, and it still may be.

I know that there are varying opinions on MS, but I am of the view that Purcell did destroy what MS was; when Mack came back, he rushed to get MS back into shape and got his traders to take huge risk to catch up to GS and others and he did it at precisely the wrong time and blew up spectacularly.  What was left was not so inspiring.  Even now, I don't see anything that exciting about MS.

But as I listened to the earnings call and flipped through some recent investor presentations (available at the MS website), one slide really stood out to me and I think was one of the factors that really made MS's stock price pop up a lot.

I was always wondering what was wrong with MS; why couldn't they earn better ROE?  Merrill was doing fine.  JPM was doing fine. 

And then the below chart just hit me over the head.  Maybe this was available before and I only noticed it recently.  But this chart shows the roadmap for MS to get their ROE over 10%.

What struck me is that with the current plans in place, MS is on it's way to earn an ROE of 9-10%. 

They can get to 9% with current plans and with no changes in the market environment.  By returning excess capital, they can get it up to around 10%.  If the operating environment improves, this can get ROE to over 10%.

It also helps that Dan Loeb is now long a bunch of MS.  It's always nice when someone is there for the shareholder to make sure management follows through on plans and achieve their goals.

If the turnaround continues, MS can get back to at least BPS, which is up close to $30/share.

But...
So I do like the financials.  I have liked them since late 2011 when I started posting about it on this blog.  Financials have done well since then, but I do think most of them are still pretty cheap.

I think there is still a lot of fear.  The press keeps talking about derivatives and leverage; people always worry about the last blowup and expect it to happen again really soon.  But my bet is that that rarely happens; you don't get two similar blowups so close to each other.  Yes, there is a financial crisis every few years.   When the stock market crashed in 1987, people worried about another stock market crash for years thereafter (and it has yet to happen).

But I really doubt that there will be anything with the major banks in the next few years.  Once people stop worrying about the last crash, money will start coming back to financials and valuations will normalize.  And again, when I say 'normalize', I don't mean get back up to bubble levels.

On the other hand, I understand that financials are getting mighty popular these days.  Someone who hated BAC at $5 is now saying it's a great buy at $12.  I don't understand that, but that's how the street works.  

Oh, and yes, there are a lot of other great banks and financial institutions.  WFC, for example.  It's a great bank.  But I do think it's sort of fully valued, even though it's not at all a bad investment.  It's not one that I would own now as I do like to buy things that are cheap that I think should be valued higher.  WFC valuation looks OK now; not cheap.  But the stock can do well when housing recovers more and they continue to increase earnings.  But it's a different type of holding than I want in my portfolio at this point.

Anyway, let's see how it goes.

Financials Still Look Good: Part 1

JP Morgan Earnings
So JPM announced earnings and things look pretty good to me.  Sure, there is still steady NIM pressure and this will be an issue this year too.  I think they said it will be a $400 million or so headwind in 2013.  But otherwise, things look pretty good.

I know people say that earnings actually aren't so great as they benefited from a refinancing boom and reserve releases, but I really don't find that a problem at this point.  Reserve releases just means that they over-reserved in the past so to the extent that it benefits earnings now, it just means that earnings were less bad in the past.  As for the refinancing boom, this is a function of lower interest rates so this offsets the NIM decline.  There's nothing wrong with that. 

Of course, at some point if conditions don't improve, reserve releases go away and mortgage refinancings peter out, it will put pressure on earnings for sure.  This is definitely a concern.

But the way I see it, things are still in a pretty depressed state.  Housing, for example, is recovering but is doing nothing compared to what it can do.  I'm not talking about going back to the boom times of the mid-2000s, but a more solid, firmer recovery is very possible if not likely.  In that case, all sorts of areas that are depressed now will start to come back slowly.

The investment bank too seems to be doing very well and it is hardly boom times in that area too.

I still think "normal" is much higher than here for the banks so any reduction in mortgage refinancings, reserve releases and stuff like that is something I fully expect will be offset by "normalization" in other areas.

Also, for many of the banks, legal and other costs are very elevated now and that will also start to come down over the next few years as these problems are settled.

In any case, I don't intend to get into the details, so I'll just look at one thing I do like to look at.  First, let's remember what Dimon said in the 2011 annual report letter to shareholders:

Our tangible book value per share is a good, very conservative measure of shareholder value.  If your assets and liabilities are properly valued, if your accounting is appropriately conservative, if you have real earnings without taking excessive risk and if you have strong franchises with defensible margins, tangible book value book value should be a very conservative measure of value.

So how did JPM do in 2012 based on tangible book value?  Here's an update of the tangible book value per share from 2006 through 2012:

             Tangible BPS      Return on Tangible Equity
2006      $18.88                          22%
2007      $21.96                          21%
2008      $22.52                            6%
2009      $27.09                          11%
2010      $30.18                          15%
2011      $33.69                          15%
2012      $38.75                          15%

So in a not so exciting year for the economy or the banking industry (remember the fiscal cliff?), JPM earned a return on tangible equity of 15%.  And this is in the year of the whopping whale loss.  Not bad at all, and we see how tangible book value can be a very conservative valuation for JPM.

Apple
OK, so let's take a detour for a second.  The other day on CNBC, a prominent analyst explained his Apple stock price target of $750/share.

His rationale is that he sees AAPL earning EPS of $50 in 2013 and $60 next year. At the end of next year, he estimates they will have $200 billion in cash. Since a lot is overseas, take 75% of that cash and it comes to $150/share.

So 10x $60 estimate is $600/share plus $150/share in cash is $750.

Apple is stuck at around $500/share now so if Apple gets there in two years, that's a return of 22%/year.  It should actually get there a little sooner than that as stock prices discount earnings before it is realized. 

But let's just hold that thought for a moment.   (I have more to say about Apple, but perhaps in a future post. I realize that Apple is now down 10%, but analyst price targets are apparently coming down now too, so I'll just leave the above alone).

Back to JPM
So tangible book value per share is a conservative estimate of the fair value of JPM. What is it worth?  Given it's return on tangible equity record of the recent past and Dimon's statement that they should earn at least 15% ROTE over time, I think 1.5x tangible equity is not unreasonable at all.

Assuming JPM can grow tangible book value per share at 12%/year like it has in the recent past, that gets us to a tangible BPS of $48.61/share by the end of 2014.  Put a 1.5x multiple on it and yet get a stock price of $72.92/share.

With the stock selling now at $46.50, that's 25%/year return from here (before dividends), better than Apple! 

OK, I am just comparing JPM to AAPL for fun so don't bother with the hate mail.  I know the rest of the world far prefers Apple to an opaque, highly levered, scary bank.  But I thought it was sort of interesting.  This is not to suggest that JPM is a better investment than AAPL.    JPM has a lot of risk and so does AAPL.

But What About NIM?!
NIM to me is still the primary risk in investing in banks.  I don't worry about another whale loss at all.  But we have to remember that banks are dynamic institutions, not static, unmanaged entities.  If NIM continues to go down, then I am confident that unlike Japanese banks, it will be managed accordingly.  If NIM becomes too thin, uneconomic loans won't be made.  If certain business lines don't earn a hurdle return rate on capital, then the business won't be done.  This is not how business is done in Japan (maybe more on that in a later post).   If there is excess capital because of that, excess capital will be returned to shareholders.

As long as the bank(s) is well managed, I think things should be OK.

Whale Loss Report / Atlantic Magazine Article
I read the JP Morgan task force report on the CIO incident (see here) and it was a great read.  Or, I should say, an unpleasant read for a shareholder.  Does it scare me that this happened?  Not really.  It is actually quite shocking that they tried to manage such a large, complex position with billions in notional amount outstanding on a spreadsheet with a junior employee cutting and pasting data from one spreadsheet to another.   There are other scary things in there.

But the reason why I am not so worried about this is that from the beginning I knew that this blowup occured because the CIO was treated differently than the rest of the company.  It was sort of like a teacher's pet project; Dimon had such faith and confidence in Ina Drew that he gave her a lot of rope and didn't have the firm risk management on top of CIO like it had on other business lines.  As far as Dimon was concerned, if Drew was OK, he didn't need to have anyone else check it out.   I think that was the critical error on the part of Dimon and JPM.

So in that sense, it is highly unlikely that anyone else can be doing something similar elsewhere in the firm.  Of course it's possible.  Nobody can say it can't ever happen.  But I feel like I understand the personal / political dynamic that was going on at JPM at the time.

I also quickly skimmed the recent Atlantic Magazine article on how a whale-like blow-up can happen again and I thought the article was ridiculous.  This is not to say that it can't happen.  But the article really doesn't raise anything new and uses large numbers that do tend to scare people, like the notional amount of derivatives sitting on bank balance sheets.

The article mentions that Bill Ackman thought "for once I thought you could trust the carrying values on bank books" after the crisis and bought $1 billion of Citigroup stock in 2010 and then sold out last year at a loss of $400 million.  Ackman is quoted as saying, “For the first seven years of Pershing Square, I believed that an investor couldn’t invest in a giant bank. Then I felt I could invest in a bank, and I did—and I lost a lot of money doing it.”

But does this have anything to do with bank disclosure or bad trading on the part of Ackman?   I don't think there was a disclosure/opacity issue responsible for his loss.

Notional Amount is Not Indicative of Risk
Also, as is usual in these articles, they raise the issue of the astoundingly large notional amounts of derivatives outstanding.  Wells Fargo has $2.8 trillion on it's books, but that's nothing compared to $72 trillion on JPM's books.  These are huge numbers.   These figures are usually compared to GDPs.

This figure is really not all that relevant in measuring risk.  I don't know if accounting and ISDA standards have changed since I've been in the business, but if it hasn't changed much, this notional amount is of very little value in measuring risk.

If I was a bank and you are a customer, you may want to fix your floating rate obligation.  So we can do an interest rate swap where you pay me a fixed rate and I pay you a floating rate.  Let's say we do this on a notional amount of $1 million.  Then let's say short term interest rates go down and you think it will keep going down so you want to go back to paying a floating rate.  We can do another swap on the $1 million.  Then we have two swaps outstanding for a total notional amount of $2 million.

So the notional amount outstanding on my book went up from $1 million to $2 million, but my risk actually went down as my exposure to you has been eliminated by an offsetting swap.  Under ISDA rules, whatever obligation we have to each other can be netted out.   Go back and forth again two more times and my notional outstanding can go up to $4 million, but my risk including credit exposure to you, has not increased at all; in fact it can be absolutely zero.  You would not know that from the $4 million outstanding notional amount figure.

People always talk about Buffett's costly unwinding of Gen Re's derivatives positions. The marks were good until they reached for it; once they started to trade out of it, the marks didn't reflect reality and it cost them a lot to get out of.   And yet, Buffett personally owns a million shares of JPM stock with $72 trillion notional of weapons of mass destruction on the books. 

How can this be?  I think it's important to remember that the sort of derivatives on JPM's books and on someone like Gen Re's (or AIG's) can be very different in nature.  Why?  JPM's credit rating and role as lead bank for many large global blue chip corporations means that it is the primary counterparty for simple, plain vanilla derivatives used to hedge foreign currency and interest rate exposure.  When Proctor and Gamble wants to hedge global FX risk, they do swaps with the likes of JPM or other major city bank.  They typically will not go to AIG or Gen Re who are not their bankers.

A major corporation like IBM may sell bonds to the public; some institutions may have a need for floating rate instruments while IBM wants to offer fixed rate, straight debt.  Someone like JPM can do the offering and do a swap with the investor (do a fix-float swap), or have IBM offer a floating rate bond and do a swap with IBM.  This can happen across currencies (IBM may offer yen bonds, swap it into fixed dollar payments etc...).

This is why the major city banks have such large notional derivatives outstanding.

Why are other institutions' derivatives more toxic and tricky?  It's because Gen Re, AIG and others can't compete and make money in plain vanilla derivatives.  They can go to Johnson and Johnson and say, hey, we want to help you manage your interest rate risk.  But they won't be able to compete with JNJ's bankers.  It could be a credit rating issue or just a banking relationship issue (main banks may be willing to do hedging transactions for very low margin as part of maintaining a relationship.  Pricing may also be more competitive as big money center banks have many similar counterparties to offset differing hedging needs etc...  There is a network effect here too).

Most likely, it will be that JNJ will already have derivatives outstanding with a few of the large banks already and to do a deal with an existing counterparty is just more efficient from a documentation, collateral management, netting and other issues.

It's hard to break into that side of the business.  This is why other institutions often have to compete in more exotic derivatives that are harder to price (and have wider spreads).

Also, most of the notional outstanding are FX or interest rate swaps.  Very little of the notional outstanding is based on equities, commodities or other volatile instruments.  Why is this important?   Think about a fix-float swap.  One counterparty agrees to pay fix and receive float from someone.  If the counterparty goes under and if the swap is effectively terminated, future payments just stop.  If the bust counterparty can't pay their fixed rate payment, then you don't pay your floating rate payment.  There is no loss of principle or anything like that.  What would usually happen is that there might be a hedging loss; whatever hedge you put on you will have to unwind and you may take a loss on it.  Typically, such losses would be covered by collateral held so no loss would be incurred unless there was a large market move after the termination of the swap.

During the financial crisis, notional derivatives outstanding was not an indication of how much risk a bank had.  In fact, people always thought that JPM would be the first domino to fall due to their derivatives book.  (Critics will say if the financial system fell, JPM would have fallen too. Dimon denies that and I side with Dimon on that one (or at least he said they would have been fine even if things got far worse; I don't know about a total collapse).  But either way, if the financial system failed and everyone went under, then it would be moot anyway; banks with less derivatives outstanding would have failed too).

The first banks to fall were the subprime lenders, then some of the regional banks like IndyMac and Wamu (not known for large derivatives outstanding).  Bear Stearns and Lehman both failed due to pretty plain vanilla positions (mortgages in the case of BSC and commercial real estate loans in the case of Lehman (the then CFO did say that commercial real estate loans was what killed Lehman; they were plain vanilla, straight loans).   AIG failed due to derivatives, yes.  But it wasn't the size that did them in but the one-sided, unhedged bets that killed them (and they were neither a bank nor an investment bank).  Citigroup's large losses occured in SIVs, a security that didn't even appear on the balance sheet; it had nothing to do with the notional derivatives outstanding.

This is not to say that there isn't some funky stuff in JPM or WFC's derivatives books.  There usually are some funky/exotic things in any book.  But they tend to be a very small part of the trillions in notional outstanding.

Other Losses
The article also mentioned a proprietary trading loss of $14 million and an economic hedging loss of $1 million (at Wells Fargo) and noted that these figures are small, but how do we know how big it could have gotten?  They talk about these small losses and tell us that it could have been far, far worse, but we wouldn't know because Wells Fargo doesn't tell us how much risk they are taking.  I found this to be reaching a bit too much.    This seems a bit silly to me.

This is not to say that there aren't any risks.   Banks / investment banks are risky businesses.

OK, I was going to talk about Bank of America, Goldman Sachs and Morgan Stanley (just brief comments, nothing deep) but this post is already really long so I'll send this out first and finish my thought in the next post.  Plus I haven't posted in a while so it'd be nice to get something out there now.

Cheap and Cheaper

I know, this is a broken record blog.  We all know financials are cheap and we all know there are plenty of reasons why they are cheap and why they might be right to be priced cheap.

However, I tend to still like the well-managed financials.

This is laughable and I don't mean to suggest financials should trade at over 3x tangible book value, but here's a valuation of historic deals in the investment banking sector I pulled out from the Merrill Lynch merger proxy (merger proxies are great sources of information; investment banks do a lot of valuation work to validate deal values and you get all that stuff for free in the filings):

OK, that came out pretty small but historic investment bank acquisitions have happened at an average of around 3x tangible book value with a median valuation of 3.4x.

Of course, this is pre-crisis so the world is quite a bit different now.

But I do think investment banks are certainly worth more than tangible book, if not a multiple of it.  Right now, people are worried about a complete European implosion and financial blowup that may be worse than what we saw in 2008/2009 in the U.S. 

Anyway, here's a list of price-to-tangible book values that was in the "Heard on the Street" page of the Wall Street Journal this morning:

                                   PTBV ratio
J.P. Morgan                95%
Goldman Sachs          76%
Jefferies Group            76%
Citigroup                    52%
Morgan Stanley          51%
Bank of America        44%

As I mentioned before, I really do like J.P. Morgan (JPM) and Goldman Sachs (GS).  I do think they are both very well managed.  JPM is a huge bank so will be subject to macro forces, but management has proven they can handle once in a hundred year events.

GS, too, has managed the crisis pretty well but they may be more flexible and agile than JPM since they are not a major bank.  Investment banks tend to be pretty nimble.  GS doesn't have a large physical presence (bank branches) or a large retail sales force (retail brokers) so don't have a large fixed cost base burden.  If things don't recover, you can be sure they will cut costs quickly and will move capital to where they can earn an adequate return.

At this point, according to the recent earnings conference call, GS is waiting for things to clear up a bit since things are in a sort of 'crisis' situation.  They do think that when things stabilize they will be able to deploy capital profitably.  If they thought this downturn is permanent, they would then use their excess capital to repurchase shares (and will probably cut more costs).

An interesting play here too is Jefferies Group (JEF).  I don't own JEF, but tend to really like it especially so cheap.  They are a small investment bank which has good sides and bad.  Right now, they are seeing the bad side of it.  JEF shares have tumbled alot after the MF Global blowup; people are now concerned about smaller firms that are too small to survive (versus too big to fail firms).

Some of my favorite value managers at Leucadia (LUK) bought into JEF stock on this decline as they are confident in the management of Richard Handler.  I think JEF will be able to pull through this as they do have a great reputation and Handler is known to be a conservative CEO (unlike the more risk-taking, reckless Corzine).

But in finance, you never know.  Good firms will go down in crisis situations, sometimes (although I don't think that happened in the 2008/2009 crisis; I think the firms that went down in that crisis weren't really good, well managed, conservative firms.  They were reckless, aggressive, overleveraged, horribly managed firms (BSC, LEH etc...)).

The good side of a smaller investment bank like JEF is that they may have more opportunities if they have a good niche (many smaller investment banks like Cowen haven't made money in years) and are well-managed.  The good thing is that they don't depend on mega-deals.  Bigger investment banks have to do bigger and bigger deals to increase revenues, just like larger and growing private equity funds have to do bigger and bigger deals to deploy bigger and bigger amounts of capital.

Anyway, all of these are financial companies and as I keep saying, one should be very careful how much exposure they have in any single sector (otherwise, I would be buying JEF too, but I have enough financial exposure now).

If Europe does really implode, financials can certainly go down more.  By their very nature, they are risky and another financial crisis of bigger than 2008 proportions is not a zero probability.

I do talk a lot about financials here now just because I do tend to think they are cheap, and because of my experience in the industry I tend to be more comfortable with some of them than most other investors and the general public (that seem to resent/hate financials!).

But that doesn't mean investors should pile into these things too much!