To The Moon

Warren Buffett, the 92-year-old CEO of Berkshire Hathaway and seasoned investor, recently offered his insights into the current banking industry. Buffett withdrew his investments from several banks after discovering problematic financial practices among their leadership.

Warren Buffett says more banks may fail, but he's willing to bet $1 million that depositors won't lose money - MarketWatch

Buffett recently sold off several banks as their leaders took "foolish" risks and engaged in deceptive accounting practices. In a recent CNBC interview, he discussed his concerns about the banking industry, which is facing upheaval following the collapse of $SVB Financial Group(SIVBQ)$ and Signature Bank in March.

Buffett's concerns about banks

Buffett observed that some banks valued their assets based on cost rather than market value and exaggerated profits by mismatching assets and liabilities.

For example, these banks accepted customer deposits that could be withdrawn at any time and used them to purchase long-term government bonds and mortgage-backed securities. It was precisely this practice that led to the collapse of Silicon Valley Bank in March due to a surge in withdrawals.

Buffett sold these bank stocks:

Buffett emphasized that despite holding $Wells Fargo(WFC)$ for around 25 years, his company sold its last remaining shares in the first quarter of 2022. In the past three years, Berkshire Hathaway has exited positions in $JPMorgan Chase(JPM)$ , $Goldman Sachs(GS)$ , $M&T Bank(MTB)$ , and $PNC Financial Services Group Inc(PNC)$ , while also reducing its holdings in $Bank of New York Mellon(BK)$ and $U.S. Bancorp(USB)$ .

Buffett added these bank stocks:

However, the company has established new positions in $Citigroup(C)$ , $Ally(ALLY)$ , $Jefferies Financial Group Inc.(JEF)$ , and $Nu Holdings Ltd.(NU)$, and increased its holdings in $Bank of America(BAC)$.

Bank of America is now Berkshire Hathaway's second-largest holding company after $Apple(AAPL)$ . Despite these acquisitions, the total value of its bank stocks has fallen by 49% over the past three years, from $75 billion to $39 billion.

Any other concerns?

According to the Wall Street Journal, Moody's Investors Service recently downgraded the credit ratings of 11 regional banks in the United States. This downgrade could lead to increased borrowing costs for these banks, making it more challenging for them to raise funds and maintain profitability.

In addition, as banks face a struggling commercial real estate (CRE) market, there is increasing concern about their ability to withstand potential economic shocks. With the pandemic continuing to impact businesses and the wider economy, the CRE market has been facing headwinds.

In particular, retail and office properties have faced significant challenges, including reduced space requirements and an increase in delinquencies and defaults. This has raised concerns that if the CRE market does not recover quickly enough, banks' loan portfolios could face significant losses.

Is there any hope?

Despite these concerns, it is worth noting that the big banks have delivered optimistic results. As many as five of the six largest US banks have performed better than expected overall, with one bank's earnings being mixed.

Nevertheless, if you want to follow Warren Buffett, you may want to stay away from $SPDR S&P Bank ETF(KBE)$. Instead, people can explore inverse/leveraged ETFs, such as the $Direxion Daily Financial Bear 3x Shares(FAZ)$, $ProShares UltraShort Financials(SKF)$ , and $ProShares Short Financials(SEF)$ .

What to consider with inverse/leveraged ETF investments?

Investors should note that these inverse leveraged products are highly volatile and only suitable for short-term trades. It is also essential to understand that they may not always move in the opposite direction of the market and may not necessarily be the most effective hedging tools.