44 - Investing in Bank Stocks (WFC, CFR, ALLY, DFS)

Mental Models discussed in this podcast: Credit Leverage Please review and rate the podcast If you enjoyed this podcast and found it helpful, please consider leaving me a rating and review. Your feedback helps me to improve the podcast and grow the show's audience.  Support the Podcast on Patreon This is a podcast supported by listeners like you. If you'd like to support this podcast and help me to continue creating great investing content, please consider becoming a Patron at DIYInvesting.org/Patron. You can find out more information by listening to episode 11 of this podcast. Show Outline: Bank Investing The full show notes for this episode are available at https://www.diyinvesting.org/Episode44 Four Types of Banks for discussion: Wells Fargo (WFC) - National and Global Bank (ROE about 13%) Frost Bank (CFR) - Regional bank focused solely on Texas (ROE about 13%) Ally Bank (ALLY) - Online-only bank (ROE about 12%) Discover Financial (DFS) - Niche bank focused on credit cards (ROE about 26%) The Business Model of Credit Card Companies Take in deposits and then make loans on those deposits A highly leveraged business model Leverage is your enemy Leverage is your friend Two ways to make money: Bring in deposits at low cost Make loans at high returns Quality of the business: Driven by two factors: Deposit retention Cost of deposits Infinite durability - there will always be a need for banking services High switching costs Potential Threats The high number of competitors Low-interest rates Competition on rates paid for deposits Liquidity crisis - see 2009 financial crisis Making bad loans - see 2009 financial crisis Too much leverage - see 2009 financial crisis Summary Investing in banks is an attractive proposition. However, banks also come with major risks. Even your most average bank operates at a very high rate of leverage. Leverage can be both a curse and a blessing. Unfortunately, you will have to do your research on each individual bank to determine how their leverage is being used.