The Motley Fool Discussion Boards

Previous Page

Real-Money Stock Picks / iPIG Portfolio

URL:  http://boards.fool.com/where-i-run-into-trouble-with-banks-is-debt-isnt-30701977.aspx

Subject:  Re: Wells Fargo (WFC) Date:  5/25/2013  2:20 PM
Author:  kelbon Number:  146 of 604

Where I run into trouble with banks is debt isn't the same for a bank as it is for other companies, it is their inventory. I deposit money or buy a CD and the bank incurs debt.

What debt is 'debt' and what debt is inventory?



It's true that deposits go into the "liabilities" column. However, this is a separate line-item than long and short-term debt. What Chuck is referencing is the banks short and long-term debt.

Deposits, rather than a liability (debt), could be considered the bank's "float", or inventory if you like. Sure it's other peoples' money that the bank is a custodian of. But, the banks job is to create a profitable spread and pocket the difference before deposits are redeemed. So, "loans" (money loaned out by the bank) goes under "assets." In the case of WFC about 80% of deposits (liabilities) reappears as loans (assets) on the balance sheet.

Banks do carry hefty debt loads if you compare them to earnings (net profit). In the case of WFC, last year long-term debt was around seven times net profit.

Considering banks, people tend to fixate on book value and share price to book value. However, Buffett has said that this is a mistake as a true measure of a bank's worth are earnings and return on assets. Share price to book, in and off itself, doesn't tell you if a bank's stock is cheap or not …but I digress.

kelbon
Copyright 1996-2014 trademark and the "Fool" logo is a trademark of The Motley Fool, Inc. Contact Us