Stocks to sell

Stop! 3 Reasons Why You Should Never (Ever) Buy Bank Stocks.

As if SVB Financial wasn’t enough of a lesson for do-it-yourself investors that bank stocks are a terrible idea, the New York Community Bancorp (NYSE:NYCB) debacle is a second reminder in the past year that all but the savviest investors avoid bank stocks. 

Unlike most stocks, banks have a completely different set of financial statements from non-financial companies. Sure, they have an income statement, balance sheet, and cash flow statement, but what’s inside them sets them apart. 

The company is in a death spiral that NYCB might avoid with the $1 billion cash injection from some investment firms, including Steve Mnuchin’s Liberty Strategic Capital.  NYCB is a regional bank, which the Federal Reserve defines as those with assets of $10 billion to $100 billion. As of Sept. 30, 2023, it had net assets of $111.2 billion, which meant that its assets were over $100 million and required greater regulatory scrutiny.      

I’ve written about stocks since 2008, yet, banks continue to frustrate me, and my guess is most of the do-it-yourself crowd. If you don’t know what tier 1 capital is, do yourself a favor and invest in bank stocks through ETFs. Here are three reasons why. 

ETFs Are Almost Idiot Proof

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The beauty of investing in ETFs to provide exposure to specific industries is that the funds, whether passive or active, are doing the heavy lifting, including portfolio construction and stock selection. You only have to know that you’re getting a portfolio of bank stocks. The rest is out of your hands–and that’s a good thing.

The SPDR S&P Regional Banking ETF (NYSEARCA:KRE) is the largest regional banking ETF by net assets, with $3.16 billion under management. It tracks the performance of the S&P Regional Banks Select Industry Index, a collection of U.S. regional banks. 

With more than $3 billion in assets, many investors have chosen to bet on regional banks through ETFs like KRE, which is a good thing. NYCB currently accounts for 1.38% of the fund’s $3.16 billion in net assets. 

Despite NYCB being down 67% in 2024, KRE has only seen a 6% decline, a more palatable loss given what’s transpired with NYCB.

Understanding the Assets a Bank Holds

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If you’re thinking about investing in banks, regional or otherwise, you ought to read this April 2023 memo from legendary distressed investor Howard Marks of Oaktree Capital Management. 

Entitled Lessons From Silicon Valley Bank, Marks wrote that the Silicon Valley demise would have less to do with more banks collapsing and more to do with investors becoming even more cautious about banks and lending.

“Because SVB had few traditional banking uses for the cash that piled up, it instead invested $91 billion in Treasury bonds and U.S. government agency mortgage-backed securities between 2020 and 2021. This brought SVB’s investments to roughly half its total assets. (At the average bank, that figure is about one-quarter.),” Marks wrote. 

However, it is these words that all investors ought to be concerned about when making bank investments.

“You wouldn’t think a portfolio consisting of bank loans and high-quality Treasury and mortgage-backed bonds could be vulnerable to a meltdown that would render a bank insolvent,” Marks wrote. 

Just because a bank holds Treasury and mortgage-backed bonds does not guarantee it won’t run into serious trouble. 

What Type of Loans Is Important to Know

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New York Community Bancorp’s commercial real estate loan problems are twofold: Firstly, it has a large exposure to multi-family properties, accounting for 44% of its $84.6 billion loan portfolio. Secondly, it also has exposure to office properties, which account for 4% of its portfolio.

Fifty percent of the office property loans are in Manhattan, which has a 15% vacancy rate. While office properties are not a big part of Manhattan’s loan portfolio, they are at risk of becoming non-performing very quickly. 

As for the multi-family loans, the biggest concern is that many of the loans in this area are with New York City landlords whose apartments are rent-regulated, restricting the amount a landlord can raise annual rents on existing tenants. 

Due to higher interest rates, the value of multi-family properties decreased. In one case reported by Bloomberg in early February, a Harlem property sold for 59% less than what it sold for in 2016. With the repricing of apartment values, NYCB’s margin of safety goes out the window. The bank continues to strengthen its loan portfolio, with reports indicating it is selling some of its loans to non-banks. 

There’s plenty of evidence that bank stocks are a different animal altogether. 

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.

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