âBe greedy when others are fearful. Be fearful when others are greedyâ. This is what the Oracle of Omaha once famously said to his shareholders.
Buffett’s investment
Shortly after the Lehman Brothersâ collapse Buffett bought top blue-chip securities, including those of Goldman Sachs and Bank of America.
That time was really tough for banks, and many were close to going bankrupt. Central banks all over the world cut interest rates, to zero in some cases. Governments bailed out major banks and took extreme fiscal measures to save their national economies.
Buffett’s investment paid off very nicely. He took advantage of the panic and bought ‘too big to fail’ banks at record low prices. Bank of Americaâs shares became almost 10 times more expensive since the Great Recession. Goldman Sachsâs stock appreciated more than five times.
Crisis causes
The causes of the 2008â2009 crisis were totally different from todayâs market sell-off.
The main reasons were the mortgage crisis and the reckless investment methods banks, insurance companies, and hedge funds were using. There were very high levels of personal and corporate debt. Moreover, many investment companies clearly lacked proper diversification.
The situation in the US had a dramatic effect on other countries, including the UK. This was due to many financial organisations having exposure to high-risk US mortgage-backed securities. Â Â
Today’s market panic
Today, we find ourselves in a similar panic situation, although the causes of this sell-off are different. Shares of major banks have plunged. The UK government announced a ÂŁ330bn support package for small businesses and said that it is prepared âto do whatever it takesâ.
The Bank of England also announced that it would provide commercial banks with ÂŁ190bn in extra money to ensure they have sufficient liquidity and are able to support small businesses.
The share prices of the banks I will mention below reacted positively after this decision was announced. However, they quickly erased all their gains, as coronavirus panic and a no-deal Brexit fears hang in the air. Nonetheless, the Bank of England’s willingness to support the financial sector is encouraging.
Top banks
I think the banks mentioned below have merit as investments, despite the current difficult situation, because they are sure to survive:
Lloydsâ recent earnings were a bit discouraging. But this resulted from one-off charges relating to payment protection insurance. The bank has been aggressively cutting costs by closing some offices, reducing staff, and encouraging customers to access the banksâ services online. These measures, of course, will also help during this coronavirus crisis.
The bank’s price-to-earnings ratio (P/E) is near a record low of 8. The dividend yield is now close to 10%, and the share price is hovering near a 52-week low.
HSBCÂ came up with a restructuring plan and recently appointed a new CEO of its business in China. The bankâs earnings decreased by more than 50% in 2019 compared to the year before. However, the P/E is almost 17 and the dividend of 50 GBX is not adequately covered by 2019 earnings of 30 GBX per share.
Barclays is the only one of the three whose earnings increased between 2018 and 2019. EPS (earnings per share) rose from 21.9 to 24.4 GBX, making the P/E ratio a little bit over 3. The current dividend yield is 12%. The bank considers its cost-cutting initiative to be its top priority.