Are banks a safe investment in 2023 and going forward?

Many people are wondering if banks are a safe investment in 2023 going forward, especially after the global financial debacle of 2020-2021 generated by the pandemic. In this blog post, we will explore some of the factors that affect the stability and profitability of banks, and how investors can assess the risks and rewards of investing in them.

Banks are financial intermediaries that provide various services to customers, such as deposit accounts, loans, mortgages, credit cards, and payment systems. Banks earn money by charging interest on the money they lend, and by collecting fees for the services they offer. Banks also invest some of their funds in securities, such as bonds, stocks, and derivatives, to diversify their income sources and hedge against risks.

However, banks also face many challenges and uncertainties in their operations. Some of the main risks that banks face are:

• Credit risk: the risk that borrowers will default on their loans or fail to meet their obligations.
• Market risk: the risk that changes in market prices, interest rates, exchange rates, or other variables will affect the value of the bank’s assets and liabilities.
• Liquidity risk: the risk that the bank will not have enough cash or liquid assets to meet its obligations or customer demands.
• Operational risk: the risk that the bank will suffer losses due to human errors, fraud, system failures, cyberattacks, or external events.
• Regulatory risk: the risk that the bank will face legal penalties, fines, or restrictions due to non-compliance with laws, regulations, or standards.

These risks can affect the bank’s solvency (the ability to pay its debts), profitability (the ability to generate income), and reputation (the trust and confidence of customers, investors, and regulators). If a bank is unable to manage these risks effectively, it may suffer losses, insolvency, or even bankruptcy.

Therefore, investors who are interested in investing in banks should carefully evaluate the bank’s financial performance, risk management, capital adequacy, and growth prospects. Some of the key indicators that investors can use to assess the bank’s health are:

• Return on equity (ROE): the ratio of net income to shareholders’ equity. It measures how well the bank uses its capital to generate profits.
• Net interest margin (NIM): the difference between the interest income and interest expense divided by the average interest-bearing assets. It measures how efficiently the bank earns money from its lending activities.
• Non-performing loan (NPL) ratio: the ratio of loans that are overdue or in default to total loans. It measures how well the bank manages its credit risk and loan quality.
• Loan-to-deposit (LTD) ratio: the ratio of total loans to total deposits. It measures how reliant the bank is on deposits as a source of funding.
• Capital adequacy ratio (CAR): the ratio of the bank’s capital to its risk-weighted assets. It measures how well the bank meets the regulatory requirements for minimum capital levels.

These indicators can vary depending on the type, size, and location of the bank. Therefore, investors should compare them with industry averages and benchmarks, as well as with historical trends and peer groups. Investors should also consider other factors that may affect the bank’s performance, such as macroeconomic conditions, competitive environment, innovation potential, and social responsibility.

Before we go and make a conclusion on the matter, we would like to present you on the bankruptcies of some prominent banks in the last period, some of them were a shocker, even to the most seasoned financial advisors.

Silicon Valley Bank: The Tech Giant That Crumbled

Silicon Valley Bank (SVB) was founded in 1983 and became one of the leading banks for startups, venture capitalists and innovation companies in the US and abroad. It had over $100 billion in assets and more than 3,000 employees at its peak. It was known for its high-risk, high-reward lending strategy, as it provided loans and banking services to many tech firms that had little or no collateral or profitability.

However, this strategy also exposed SVB to significant vulnerabilities, especially when the tech sector entered a rough patch in late 2022 and early 2023. Many of SVB’s clients faced financial difficulties, defaulted on their loans or withdrew their deposits, putting pressure on the bank’s liquidity and capital. Moreover, SVB suffered huge losses on its bond portfolio, as the Federal Reserve raised interest rates to combat inflation, causing the value of previously issued bonds to plummet.

These factors triggered a bank run on SVB in March 2023, as customers rushed to withdraw their money amid rumors of insolvency. The bank was unable to meet the demand for cash, and the Federal Deposit Insurance Corporation (FDIC) stepped in to seize the bank and sell its assets to another institution. However, no buyer was found, and SVB became the largest bank failure in US history since Washington Mutual in 2008.

Signature Bank: The Crypto-Friendly Bank That Lost Its Trust

Signature Bank was another prominent bank that catered to the tech industry, especially the crypto space. It was founded in 2001 and had over $80 billion in assets and more than 1,500 employees. It was one of the first banks to offer blockchain-based payment solutions and banking services to crypto companies and investors. It also had a reputation for being customer-centric and innovative.

However, Signature Bank also faced challenges in 2023, as it was involved in several scandals and lawsuits that tarnished its image and credibility. In January 2023, it was revealed that Signature Bank had facilitated money laundering and tax evasion schemes for some of its crypto clients, who used offshore accounts and shell companies to hide their transactions. In February 2023, it was sued by several customers who claimed that Signature Bank had misled them about the risks and returns of investing in crypto products.

These events eroded the trust and confidence of Signature Bank’s customers, who started to withdraw their funds or switch to other banks. Signature Bank tried to reassure its customers that it was solvent and compliant with regulations, but it was too late. In April 2023, a bank run ensued, and Signature Bank ran out of cash. The FDIC intervened to take over the bank and look for a buyer. However, no buyer was willing to take on the legal liabilities and reputational damage of Signature Bank, and it became the third bank failure of 2023.

The collapse of SVB and Signature Bank has sent shockwaves through the financial system and the economy. The FDIC has announced that it will cover up to $250,000 per depositor per account for both banks, but many customers have lost access to their funds or have balances above the insured limit. The FDIC has also said that it will need additional funding from Congress to cover the losses from these bank failures, which are estimated at over $10 billion.

The Federal Reserve has taken emergency measures to stabilize the financial system and prevent contagion effects from spreading to other banks. It has launched a broad lending program to provide liquidity to banks that are facing cash shortages or deposit outflows. It has also lowered interest rates and resumed bond purchases to support the bond market and ease credit conditions.

The bank failures of 2023 have exposed the fragility and complexity of the banking industry, especially in the tech and crypto domains. They have also highlighted the need for more vigilance and oversight from regulators, more transparency and accountability from banks, and more awareness and education from customers. The lessons learned from these events may help prevent similar crises in the future, but they also pose new questions and challenges for the financial system and the economy.

In conclusion, banks are complex and dynamic institutions that offer both opportunities and challenges for investors. Investing in banks requires careful analysis and due diligence of their financial health and growth potential. Investors should also be aware of the risks and uncertainties that banks face in their operations and environment. All on all, if the price is right the risk can be taken on, because we need to risk it to get the biscuit!