What I like most about the banks I use is that I hardly ever think about them. It’s there to handle certain services for me and my business. They take my money and invest it, but it’s always there when I need it.
At least, I assume it’s always there. That’s why bank runs, where depositors can clamor for so much of their cash at the same time that the bank doesn’t have enough in their reserves to handle the demand, can be so scary.
I have a client whose grandmother, who grew up during the Depression, had deposits in half a dozen banks and stashed cash around her apartment. She was that mistrustful of banks. And that’s why the FDIC, which insures deposits, is so necessary.
Our banking system plays a vital role in the nation’s economy. But banks also have a unique capacity to wreak havoc. In recent history we had a wave of 1,600 FDIC-insured banks fail between 1980 and 1994, and with 32% of savings and loan institutions failing. Then the subprime mortgage crisis of 2007-08. And now another possible crisis that began with the failure of Silicon Valley Bank.
It's too early to say whether this is just a cold or the flu for the banking system. Some analysts have been suggesting that SVB’s problems are more or less confined to a subset of banks that serve businesses and new ventures. That might be, but I’m holding my breath a little. It reminds me of the old analyst saying: “Any company can have a bad quarter. But it’s never just one bad quarter.” There’s still a chance we’ll see a number of other banks get into trouble in the coming days.
The uncertainty is why we’ve seen stocks for a lot of publicly traded banks, particularly regional ones, suffer significant decreases. Maybe some of this decline was because investors’ nerves are still raw from the financial collapse 15 years ago. I also think one of the issues with investing in this sector is the lack of transparency. It can be difficult to know what’s going on exactly with a bank’s investment portfolio. The lack of transparency could be a reason bank price-earnings ratios are often low compared with their earnings growth. As of mid-March, the average P/E for financial institutions was 5.9. Compare that with 32.4 for Wal-Mart, which is a low-growth company.
I do believe there are bargains to be had in this sector. I’d argue that a good number of these banks aren’t exposed to the same types of risk SVB faced and that they practice sound, prudent risk-management strategies.
I just think it will be difficult for Main Street investors to identify those banks. They all tend to convey the same safe, prudent image. After all, nobody wants to deposit their money in Crazy Ed’s Bank. So if you’re thinking of scooping up a bargain bank stock, see whether your financial advisor has resources to help you identify well-managed companies selling at reasonable prices.