In 2008, we all thought banks were bye, bye, bye. Five years later, everyone is saying buy,
buy, buy. Or Warren Buffet is
anyway. In an interview with Bloomberg last week, Buffett said:
“The banks will not get this country in trouble, I guarantee
it. Our banking system is in the best
shape in recent memory. The capital ratios are huge, the excesses on the asset
side have been largely cleared out. We do not have an unusually concentrated
banking system compared to the rest of the world, and there are certain
advantages in the largest capital market in the world to having banks that are
somewhat consistent with the size of those markets.”
Buffett’s firm has investments in at least four of the seven
biggest U.S. lenders by assets, including a stake of more than $14 billion in Wells
Fargo, $5 billion in Bank of America, a holding in U.S. Bancorp and warrants
that allow it to buy $5 billion of Goldman Sachs shares. The latter was due to
a $5 billion in September 2008 during the peak of the crisis, which Buffett described as “a bet essentially on the fact that the government would not really shirk
It was more than that.
His firm, Berkshire Hathaway, received a 10% annual dividend on the
investment and warrants to buy $5 billion in common stock at a strike
price of $115 per share. Today, Goldman
is trading at $144 a share so it’s not a bad investment, but it’s not a great one either.
Nevertheless, Buffett is not in this for short-termism. As he went on to say: “Nine years from now I
would think that Bank of America as well as Wells Fargo and probably the other
major banks will be worth considerably more money than they are now.”
From the perspective of a market observer, there have been
several moments when banks have seemed under-priced, particularly as we are
talking of values for UK banks that are over 90% down from their peaks in 2008.
Lloyds was trading at 450 pence per share five years ago. Today, it’s just over 50p.
The same is true for RBS, which is 360 pence per share today compared with around 3600 five years ago
(bearing in mind the ten for one share consolidation).
Obviously, Barclays and HSBC have fared better, but they are
also down on 2008 by over a third, with Barclays at 297 pence per share today compared with
over 450 five years ago, and HSBC at 694 compared with 920 in 2008.
So shoud you be buying ban sahres today?
Well maybe not.
It seems that every time I’m about to buy bank shares, some
new scandal hits the sector.
The last time I was going to buy bank shares, LIBOR hit the
streets and share prices tanked.
The time before, the Eurozone crisis hit and bank share
No wonder the trading in a bank like RBS looks more like
some sort of weird Himalayan mountain range over the last two years than a
But then there is a good news story underlying these charts,
and this may be where Buffett is right.
Over the last six months, almost all investments in UK banks
would have seen your money almost doubled.
Barclays was trading at 150 in August. Today, its almost 300.
Lloyds was 28, and today it’s 54; RBS was 196 and today it’s
360; and even HSBC was down at 510 and today it’s 694.
So shares have been rallying in the banking sector as the
Eurozone crisis is stemmed and the bad news stories have all hit the headlines
and hopefully have gone away.
In fact, if you look at the All Bank Index that tracks all the key bank stocks worldwide, the sector is looking pretty
good, up 50% across the board in the last six months.
So would I invest today?
Hmmm … maybe not.
After all, we still have to see what happens with the European
Liikanen Report, ring fencing, more LIBOR fines and more, there's still a lot more bank restructuring to take place.
This is illustrated well by today’s headline that RBS is to shake up and shut down
parts of its investment bank.
In fact, as mentioned in my 2013 predictions, there’s still
a lot of issues facing the banking sector in 2013.
Nevertheless, if you’re a betting person then now’s as good a
time as ever to invest and, if you’re not a betting person, now is an excellent
time to invest. As Warren Buffett says: “Nine
years from now, I would think that the major banks will be worth considerably
more money than they are now.”
Get in for the long-term and you’ll do fine and, with RBS
and Lloyds still at their lowest ebb, that’s where the good money should go.
As I said in my predictions for 2013: RBS and Lloyds will
become stable bets for the future.