3 Reasons to Invest in Banks

People are worried about investing in banks because of their customers not paying their mortgages. This is the best time for a long-term investor to be looking at investing in the banks, the right bank that deals in mortgage lending. Here are three reasons why.

   1. In 2008 which people are comparing to because people stopped paying on their mortgage, homeowners were under water and the value of their home was below what they owed. Today we have the opposite situation. Home Inventory is low, prices are rising and people will not let that equity they have in the home go and will do whatever they can to pay that mortgage. If they can’t pay their mortgage and their house is foreclosed on the bank will receive an asset worth more than the loan on that home.

   2. When banks write down the value of mortgages from non-payment, they always go over the true amount to be conservative in their accounting. That is a write off against their earnings (which causes lower earnings today) but when people resume payments on the mortgages it becomes income to the bank. We could see this in the next 6 to 18 months and the income for banks will look very impressive. When investing it is important to understand accounting of the company one is investing in.

   3. Banks are flush with cash and at no risk of having financial problems like back in 2008. With the new COVID-19 requirements from the Fed, banks are forced to be even more conservative and not use any money for stock buybacks. This will continue to strengthen the banks balance sheets and just imagine how the cash will grow in a couple of years - they will have excess cash to again buy back shares and maybe increase dividends as well. And don’t forget about item number one, the extra earnings they will have. If you are a long-term investor you do not want to miss the opportunity of investing in banks.3