Skip to main content
No. of Recommendations: 0
Whats the risk in investing in banks (in organization)
Print the post Back To Top
No. of Recommendations: 3
If there is a recession, as some are predicting, the banks could be hit hard. Also, if Dems win big in 2020, the leash on big banks that has been someone loosened under a Republican administration over the last couple years could again be tightened.

Fuskie
Who is not predicting that either will or will not happen but you asked for some risks...

-----
Ticker Guide for The Walt Disney Company (DIS), Intuit (INTU), Live Nation (LYV), CME Group (CME) and MongoDB (MDB), Trip Advisor (TRIP), Vivendi SA (VIVHY)
Disclaimer: This post is non-professional and should not be construed as direct, individual or accurate advice
Disclosure: May own shares of some, many or all of the companies mentioned in this post (tinyurl.com/FuskieDisclosure)
Fool Code of Conduct: https://www.fool.com/legal/the-motley-fools-rules.aspx#Condu...
Print the post Back To Top
No. of Recommendations: 2
Whats the risk in investing in banks (in organization)

If you have to ask what the risks are. Then it probably isn't a suitable investment for you

b&w
Print the post Back To Top
No. of Recommendations: 1
Probably the best example of risks associated with investing in banks was what happened in 2008-09. The actual crisis started in the real estate mortgage business, and so some banks were affected more than others, but the FDIC and the entire banking sector were threatened to some extent. Some banks were closed and forced into mergers by the government regulators. Banks that were put into the TARP program were forced to stop paying dividends, or limited to paying $.01/share in some cases.

That was an almost-worst-case scenario. But it was only 10 years ago.

Bill
Print the post Back To Top
No. of Recommendations: 17
If you have to ask what the risks are. Then it probably isn't a suitable investment for you

b&w


No doubt that is why the OP is asking the question...doing his due diligence before investing.

IP
Print the post Back To Top
No. of Recommendations: 6
I have to agree with IP. We strongly encourage Fools to ask questions. That is how you learn.

Fuskie
Who thinks the more correct declaration would be if you have to ask what the risk are, you don't already know the answer...

-----
Ticker Guide for The Walt Disney Company (DIS), Intuit (INTU), Live Nation (LYV), CME Group (CME) and MongoDB (MDB), Trip Advisor (TRIP), Vivendi SA (VIVHY)
Disclaimer: This post is non-professional and should not be construed as direct, individual or accurate advice
Disclosure: May own shares of some, many or all of the companies mentioned in this post (tinyurl.com/FuskieDisclosure)
Fool Code of Conduct: https://www.fool.com/legal/the-motley-fools-rules.aspx#Condu...
Print the post Back To Top
No. of Recommendations: 1
Banks are also interest rate sensitive. Banks are more profitable when interest rates are higher because they can earn more on their 'spread.' This is counter-intuitive for some people but imagine that interest rates are low, say 2%. That means that the difference between what a bank pays on savings balances (a liability) is low and the spread between that and what they earn on a mortgage (an asset) is also low. A bank might have a spread of just 1.5%

If rates are high, say 5%, then the spread between that savings rate and the mortgage rate has grown. A spread might be 4% - nearly three times as much gross profit.

When the Fed announced that they were going to pause their interest rate increases and the 10 year treasury fell along with that, I would bet that most major bank stock prices followed suit. I don't follow this industry (and it is a Monday so I am too lazy to look it up) so I could be complete wrong.
Print the post Back To Top
No. of Recommendations: 1
Hawkwin,

You wrote, ... If rates are high, say 5%, then the spread between that savings rate and the mortgage rate has grown. A spread might be 4% - nearly three times as much gross profit. ...

I would point out that absolute rates have little bearing on how much a bank makes. As you said, it's the spread. You can get some indication by looking at the short vs. intermediate or long-term rates. The difference between those rates tells you something about how profitable banks as group might be going forward. When yield curves invert, banks are in trouble same as the economy as a whole.

Of course some banks like Bank of America manage to get people to deposit cash at near zero rates even as rates have been rising. The lower these deposit rates are the less impacted by narrowing spreads the bank is, because a lot of the money a bank invests comes from these deposits. It's also why right now while spreads are so narrow that larger banks are still pretty healthy; but it's almost certainly putting a strain on smaller, local and regional banks that have to offer competitive deposit rates.

- Joel
Print the post Back To Top
No. of Recommendations: 3
I would point out that absolute rates have little bearing on how much a bank makes. As you said, it's the spread. You can get some indication by looking at the short vs. intermediate or long-term rates. The difference between those rates tells you something about how profitable banks as group might be going forward. When yield curves invert, banks are in trouble same as the economy as a whole.

Not quite accurate. The higher the rate, the more that spread CAN BE. As you mention, your local national bank isn't going to increase their savings rate at the same speed that they will increase lending rates. For example, mortgage rates today are easily 1-1.5% higher than they were a couple of years ago. Your savings rate has not likely grown as much. Absolute rates matter quite a bit. You simply cant have a very profitable spread that is much greater than 3% in a very low rate environment. Banks were not very profitable when the fed funds rate was 0% and the Prime rate was 3.25% (now it is 5.5%).
Print the post Back To Top