To The Moon

During the Great Financial Crisis in 2009, you can buy a Citigroup share for about $1.

14 years later, you would have made over 400% returns!

It was a time where banks were in a precarious situation, with big banks such as Lehman Brothers and Bear Sterns failing. No one knew who could be next, and banks stocks were sold down massively.

History doesn't repeat but it sure rhymes. Here we are again with another banking crisis.

Some investors might be thinking of buying bank stocks on the cheap, betting on the view that the entire financial system wouldn't collapse.

I agree that investing in bank stocks during a crisis can potentially yield significant returns, but it's essential to recognize that this is not an easy or risk-free endeavor.

There are several risks to consider.

First, it's important to understand the distinction between shareholders and depositors when it comes to investing in banks. Depositors are typically protected when a bank fails, but shareholders are not.

For example, when Silicon Valley Bank failed, its shareholders received nothing, while depositors were made whole. Similarly, Credit Suisse shareholders lost most of their investment, while depositors were protected.

Case in point, I noticed Credit Suisse was one of the top trades done by customers of Standard Chartered Bank last week.

Unfortunately, the buyers would have lost majority of their investments by weekend.

The buyers probably thought that Credit Suisse will be saved. Indeed it was, but its was the clients that were saved, not the shareholders.

Another crucial factor to consider when investing in bank stocks during a crisis is the extreme volatility of these stocks. Even if a bank stock has already dropped 50%, it's still possible for it to drop another 50%. Timing the market correctly in these circumstances is extremely challenging.

For instance, First Republic Bank was one of the top trades made by Standard Chartered Bank customers last week. While the bank is still trading and JP Morgan is attempting to provide additional liquidity to rescue it, the stock price has continued to decline.

Here are the day-to-day fluctuations since the crisis started for First Republic Bank:

9 Mar: -17%

10 Mar: -15%

13 Mar: -62%

14 Mar: +27%

15 Mar: -21%

16 Mar: +10%

17 Mar: -33%

20 Mar: -47%

You can see that they are all in double percentage changes. The volatility is crazy.

And if you thought that it could rebound strongly the next day after a big fall, as it happened between 13 Mar to 16 Mar, you would have been greeted with a rude shock on 20 Mar, where it fell another 47% after falling 33% the previous day.

It can be difficult to make money even for a short term trade, and holding longer means the chances of the bank going under and shareholders getting close to nothing increases.

A more prudent strategy for investing in the banking sector during a crisis is to consider purchasing stocks of banks that are not in trouble. While these stocks may not be as significantly discounted as those of troubled banks, they are more likely to survive the crisis, providing investors with a higher probability of making capital gains once the financial sector stabilizes.

One approach to identifying such banks is to analyze their unrealized losses. The chart below illustrates this concept, highlighting JP Morgan, Citigroup, and M&T Bank as three banks that have lower mark-to-market losses and are, therefore, less likely to fail.

Over the past month, JP Morgan's share price has declined by 9%, while Citigroup and M&T Bank's stock prices have fallen by 12% and 22%, respectively.

It's worth noting that larger banks, such as JP Morgan and Citigroup, have been less affected by the crisis, while regional banks like M&T Bank have been hit harder. However, these regional banks may still be viable investment options, provided investors conduct thorough research and be willing to stomach the risks.

Another approach to identifying potentially profitable investments in the banking sector is to follow the lead of renowned investor Warren Buffett, who holds substantial bank holdings.

For instance, Bank of America is Berkshire Hathaway's largest holding, and Citigroup was recently added to the portfolio in 2022. At a share price of $44 for Citigroup, you can buy at a cheaper price than the price of $45 bought by Berkshire Hathaway.

Over the past month, Bank of America's share price has declined by 20%, possibly due to its significant unrealized losses. However, despite these losses, Bank of America recently attracted $15 billion in deposits as depositors shifted their money over from Silicon Valley Bank, indicating that the bank is able to evoke confidence among its customers, thus reducing the risk of a bank run.

Bottomline, there can be opportunities in this banking crisis but it isn't without risks. I would think that the more resilient banks are relatively safer options but careful consideration is needed to identify which risks are worth taking.

Good luck and invest wisely!