Estimated reading time: 2 minutes
Over 9 out of 10 of them take their wealth and invest in real estate and a BANK. Why a bank? Bank investment returns suck! (relative to oil & gas + real estate)
Here’s the hard truth (math included).
At an average return on assets (ROA) of ~1% and average leverage of ~10x (10% capital/equity) yields a return on equity (ROE) of 10%.
NOT EXACTLY STELLAR as you are required to operate in an extremely regulated environment and the “first loss” (credit, fraud, operational, etc) is taken out of equity.
Why do they do it? Based on conversations that I have had, they are looking for a safe and secure business to diversify into and what could be safer than a bank, right? Maybe.
Investing in a bank knowing that these are the types of returns you will receive makes sense if you ensure the following:
– The bank is growing organically (organic bank growth is largely fueled by retained earnings and growing the asset + deposit base).
– The credit quality is top notch and well-managed (there is no faster way to lose your shirt in banking than with poor credit quality).
– The bank has achieved necessary scale and is operating efficiently (banks that are sub-scale or inefficient will underperform the average ROA and hence ROE of their peers).
Do you think banks are a good investment to diversify into?
I post weekly about banking, data science and family adventures.
Digging deep on banks is what I do. If there is a bank that you are curious about, shoot me a note and we can discuss this bank together.