In his recent Q1 2023 Market Commentary, Bill Nygren discussed which Bank stocks are safer investments. Here’s an excerpt from the commentary:
Nygren: The failed banks were mostly funded by uninsured deposits that tend to move more rapidly than insured deposits. Further, the banks that failed invested those short-duration deposits in long-duration bonds.
Because of the rapid rise in interest rates, those bonds lost value. If they were marked to market, the book value of Silicon Valley Bank would have been negative.
In contrast, banks we own are majority funded by insured deposits, which have less flight risk. Further, our banks didn’t make as big a bet on long-term bonds as the troubled banks did.
After marking securities to market, the book value of our banks remained solidly positive. Unlike credit problems, which tend to get worse as each day passes, duration mismatches cure themselves given time.
“Sticky” deposits provide an offset to longer duration assets and allow time to reverse mark-to-market losses. And a final difference is that insiders had been selling stock personally at the failed banks, whereas in March insiders were net buyers of the banks we own.
Competitively disadvantaged small banks struggle to match the breadth and depth of products and technology that large banks offer, so they can earn competitive returns for shareholders only by taking advantage of lower liquidity and capital requirements.
The result is that smaller banks often have larger concentrations of risk with less capital and liquidity to protect depositors.
When those risks go bad, as we saw last month, depositors move to safer big banks. The banks Oakmark owns are all over $150 billion in assets and rank in the 25 largest banks in the U. S.
We expect them to continue benefitting from economies of scale. The stock market, however, hasn’t differentiated much in the banking stock decline.
We believe the banks we own are not only cheap—most sell at single digit P/E ratios and below book value—but are also likely to grow faster than the industry. We increased our bank stock holdings in March.
You can read the entire commentary here:
Bill Nygren – Market Commentary Q1 2023
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