Mental Models discussed in this podcast:
- Credit
- Leverage
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You can find out more information by listening to episode 11 of this podcast.
Show Outline: Bank Stock Investing
The full show notes for this episode are available at https://www.diyinvesting.org/Episode44
Four Types of Banks for discussion:
- Wells Fargo (WFC) – National and Global Bank (ROE about 13%)
- Frost Bank (CFR) – Regional bank focused solely on Texas (ROE about 13%)
- Ally Bank (ALLY) – Online-only bank (ROE about 12%)
- Discover Financial (DFS) – Niche bank focused on credit cards (ROE about 26%)
The Business Model of Credit Card Companies
- Take in deposits and then make loans on those deposits
- A highly leveraged business model
- Leverage is your enemy
- Leverage is your friend
- Two ways to make money:
- Bring in deposits at low cost
- Make loans at high returns
Quality of the business:
- Driven by two factors:
- Deposit retention
- Cost of deposits
- Infinite durability – there will always be a need for banking services
- High switching costs
Potential Threats
- The high number of competitors
- Low-interest rates
- Competition on rates paid for deposits
- Liquidity crisis – see 2009 financial crisis
- Making bad loans – see 2009 financial crisis
- Too much leverage – see 2009 financial crisis
Summary
Investing in banks is an attractive proposition. However, banks also come with major risks. Even your most average bank operates at a very high rate of leverage. Leverage can be both a curse and a blessing. Unfortunately, you will have to do your research on each individual bank to determine how their leverage is being used.
