Bank bailouts are the topic of the hour in March 2023. Several failed U.S. banks were partially “bailed out” this month when their depositors (but not shareholders) were rescued by the Federal Reserve. Later, Credit Suisse got a literal bailout when the larger Swiss Bank UBS bought all of its shares to save it from collapse. Much like in 2008, there will be winners and losers in this round of bank bailouts. In this article, I will explore the best way to invest in the bank bailouts that are occurring in 2023.
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Step 1: Create a shortlist of banks that have good liquidity
The best way to “invest in bank bailouts” is to actually invest in banks that do not need bailouts, but whose shares are being priced as if they do need them. Stocks rise and fall with their sectors, whether or not the individual names in the sector are affected by macroeconomic factors. In 2011, Warren Buffett bought the beaten-down bank stock Bank of America partially because it did not need a bailout at the time, but was being valued similarly to other bank stocks that did need them.
So, you’ll want to take a look at beaten down bank stocks that don’t, in fact, need bailouts.
The Toronto-Dominion Bank (TSX:TD ) might be worth a look here. In its most recent quarter, TD had:
- $1.2 trillion in deposits.
- $150 billion in cash.
- $77 billion in securities measured at fair value.
- $327 billion in fair value of held to maturity securities.
- $554 billion in highly liquid assets.
So, TD’s most liquid assets cover 45.4% of its deposits. It would not likely run out of cash or liquidity due to a bank run. A brief note on the $327 billion in “held to maturity securities.” These are securities the bank plans to hold until maturity. They’re reported at cost due to the fact that the bank has no plans to sell. On the balance sheet, they’re reported as $339 billion, but their market value is only $327 billion. I used $327 billion in my calculations because I’m trying to determine how well TD could weather a disaster scenario where it’s selling securities to cover a bank run.
Step 2: Narrow the list by valuation
When you look at TD Bank, you can see that it’s very much able to survive a lot of withdrawals. It has enough cash and securities to cover its liquidity needs. However, you may be able to find banks that are similarly liquid, but are cheaper. To return to Bank of America for a minute: it’s liquid just like TD Bank is, but it also has a mere 8.5 P/E ratio, and trades below book value. So there’s a similar level of safety, at a cheaper price. You’ll therefore want to look at valuation when evaluating bank stocks, as you often find banks at similar risk levels trading at different multiples.
Step 3: Buy (or don’t)
Once you’ve determined the risk levels and valuations of your short list of banks, it’s time to buy. In general, you should go with the bank that is the least risky and also the cheapest. If the right mix of risk and cheapness isn’t available, you may not want to buy at all. Personally, I think that the buying in large banks is good at the moment.
