New Evidence: Consumer credit quality is degrading & financing companies struggle to keep up

Every quarter we look at the banking industry and do a ‘simple’ valuation of all the banks we follow. Currently, this includes 125 banks listed on US stock exchanges with a market capitalization of $1 billion or more.

It runs from JPMorgan Chase, Citibank and Goldman Sachs and reaches down to small cap banks like Dime Community Bancshares, Customers Bancorp and German American Bancorp.

We look for, and promptly ignore, banks that are valued normally. Banks where the equity valuation (with a glance at long term debt) equals the book value of the bank. This says that the bank shares trade for the accounting value of the bank. It should range from 0.85 to 1.20, and when we see that we say (ok, fairly valued or is there something wrong).

We focus on the banks with a low equity valuation (banks like Credit Suisse, Citigroup, NY Community Bancorp, and Hope Bancorp (there is a branch off I-294 near our home).

We also focus on the banks with high equity valuations, like First Financial Bankshares, Lakeland Financial and Commerce Bankshares, among some other state-specific banks. We figure people are willing to pay for exposure to banks in specific, high-growth states, or states with strong economic potential.

What we found today knocked me back on my heels. The credit quality at Discover Financial Services, with an equity valuation of 2.3 (high), has significant…