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Hello friends Valli best Store lately many banks are seeing their stock market price collapse and some of you ask me in the comments if it is a good time to buy bank shares and leaving aside the fact that I will never tell you whether or not to buy any stock I can share with you the opinion of a great investor Terry Smith who a few days ago gave an interview to the Financial Times where he explained why it is not worth investing in banks and if you want to know why do not miss this video Terry Smith He says that having spent the first decade of his career working in a bank until becoming a first-rate banking analyst people are surprised when they do not see banks in his portfolio But precisely because he knows the sector well he says and that is why he does not invest in it and what happened in Silicon Valley Bang and Credit Suisse does nothing but strengthen his belief and today I tell you why in his opinion it is not worth investing in banks First of all Smith says that he does not invest in any activity that requires financial leverage to obtain an adequate return and banks have a really small amount of equity to support their balance sheet and Smith takes as an example the balance sheet of Natwest Group a Banking holding company and to help us understand the situation better, it has simplified the balance sheet and puts, as you can see in the image, the weight in percentage of each balance sheet item and as you can see, NatWest finances with Movement 5 pounds of Equity as much as 100 pounds of assets, that is, a leverage of 20 times if 10% of the 52 pounds of loans on every 100 pounds of assets proves to be bad in collectibles.
Then the entire net worth is more than wiped out, in reality, long before this happens. It is likely that account holders understand the problem and panic and cause a run on the banks as we saw with Silicon Valley Bank, the so-called Bank Run. On the contrary, the average company in the SP500 index, including the banks, worsens the figure to 26 billion dollars in assets and 8.5 billion in Equity.
That is, on average, they have a leverage level of 3 and this is the first problem of the banks: excessive leverage. The second thing is that despite this high financial leverage and the risk that clearly accompanies it, the performance of the banking sector is inadequate. The average return of the equity capital, i.e.
the ROE in the SP500 banking sector over the last five years has been only 10.9%, while the king of the SP500 companies that operate in the consumer estaples sector instead in the essential goods sector. To give you an idea, in the same period they had an ROI of almost 18%. These poor fundamental returns obviously translate into poor share price performance.
In fact, the total return of the SP500 banking sector over the last 5 years has been minus 15.1% per year while the consumer Staples has recorded a return of over 12% per year. Therefore, the second problem is inadequate returns in risk ratios. The third thing is certainly stopping to admit that there will be good banks to invest in that are better than average.
However, this brings another problem: systemic risk. Even if the bank you invest in is well managed, it can still be damaged or destroyed by a general panic in the sector. There is an anecdote that illustrates this well. In the early 1980s, the first doubts arose about the future of Hong Kong with the looming handover to China and soon a crisis developed in the real estate sector that provided the collateral for many bank loans.
And in the midst of all this, there was one day a local bank that had an awning open over the front window to clearly keep the sun's rays out of the building and this The bank was located near a bus stop and one day there was a heavy downpour and the queue of people who were at the bus stop waiting for the bus had moved to take shelter under this awning of this bank so they were all crowded at the entrance of this bank and in the atmosphere of tension and fear that was already in the area in those days for the banking sector when the passers-by saw that crowd near the entrance of the bank they thought that was the beginning of the bank run and consequently many of them went to withdraw the money from their banks and so Smith says that whether I like it or not this is the banking sector the banks you invest in can be brought down by the actions of other banks by what other banks do Look at what happened to some American regional banks following the Silicon Valley Bank disaster Lord Mervin King, that is the former governor of the Bank of England says Smith that one day summed up this situation of the Bench Run well by saying that the bank run is something that makes no sense but once it starts it is better for everyone to join the crowd Smith says that these reasons are already more than enough for him not to invest in banks But in recent years a third has been added, fintech What are the essential functions of a bank taking deposits making loans and making payments all these essential functions can now be done by the so-called fintechs the prices of banks are being replaced by Peer to peer landing platforms And from credit funds you no longer need a bank for payments or deposits you can get your salary paid directly even to a digital wallet and they are much better at processing payments These fintech companies says Smith and you can do everything conveniently from your smartphone so technology is supplanting traditional banks Smith asks have you noticed Where before there was a bank branch now there is a Pizza Express which among other things Smith says earns even more than a bank branch not only will it be even worse because traditional banks have to comply with banking requirements they have constraints while many fintech services do not have them and to conclude the interview Smith quotes a statement by Paul Walker the infamous former chairman of the Federal Reserve who said the only innovation of a certain importance by the banking sector in the twenty years that have The ATM preceded the global financial crisis of 2008, that is, the machines for withdrawing cash.
And today we don't even need them anymore because electronic payments have become available. So, as you've seen, Smith is very Belizean about banks and in my opinion, he's sincere in what he says. He certainly knows what he's talking about because he was a great analyst in the sector in the past and in the end, what he does confirms what he says because he and his fund actually don't invest in banks.
I personally don't invest in them either. Also because it's a business outside my circle of expertise. That is, it's not that they don't understand them, I understand them, but I don't have any competitive advantage over the masses. In my opinion, it's complicated to understand exactly what's in the assets of the bank we're going to invest in, so I can't tell you if Smith is 100% right.
For me, he was very convincing. I hadn't invested in them before, and he gave me other reasons to continue not to invest. It's true, however, that Charlie and Warren, for example, invest in them, but they invest in them because they think they're excellent sectors to invest in, or because they have their circle of expertise.
and if they could instead invest in software companies SAS informatica etc. ones Sector of a Hearts with second because let's not forget that the company that has almost 40% weight in Warren Buffett and Apple's portfolio is not a bank let me know what you think of the banking sector If you invest in it If you want to invest in it or if you agree with Smith a like to the video if you liked it and see you next time Ciao from Davide
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