Banks: The Business of Leverage

Overall an insightful refresher on the business of banking, although I suspect the author confused capital with funding somewhere in the article. The most interesting new perspective I learned here is that a bank with > 1 P/B creates value for shareholders if it issues new equity capital; while a bank with < 1 P/B destroys value if it issues. So there is a compelling distressed bank play for me: if I see a distressed bank with < 1 P/B that's forced by regulators to increase its equity capital, there could be an opportunity for me to scoop the new equity on the cheap. But it's a high-risk trade of course cuz the bank was cheap most likely for a reason, and there's likely NPLs in the waiting. And it's interesting to note that banks are a 'mediocre business' (as described by Derek Pilecki) cuz we have to lever up so much (as noted by Nine One Capital, banks usually carry $100 or more of assets for every $10 of equity capital) just to earn normal corporate returns. The reason why is cuz the product we sell (i.e. money) is completely fungible - a coffee shop for example buys coffee beans, roasts them, and turns them into coffee which can be marked up; a bank cannot mark up money. Furthermore this Indian guy seems like a better equity analyst than Aaron Pek at this point.