
Banks are one of the key pillars of the economy, having a wide influence on private individuals, and businesses. Shares of banks can occupy an important place in the investor’s portfolio, but, like any other investment, investing in bank shares is inherently risky. The head of Financial Markets Swedbank Thomas Arak explains why and when to buy
bank shares. Many banks regularly pay dividends, which makes their shares attractive to long-term investors. If you are seeking a passive source of income, bank shares may be a good choice. Large banks in Europe, America, and also in Scandinavia, including Swedbank, and local banks in Estonia
historically have offered investors decent dividend yields. Banks receive revenue from lending, commission charges and investment activities. In periods of economic growth, when companies and private individuals borrow more loans, and investment activity increases, bank
shares can demonstrate significant growth potential. Regulation, especially over-regulation, often appears to be a negative factor for businesses. Banks are one of the most regulated industries in the developed world, but from the investor’s view it gives a bigger sense of security. Banks are relatively transparent in their accountability and don’t take excessive risk in business. In the Case of Estonia, where the banks are
owned by strong
Scandinavian mother companies, the risk in together is low. In the time of recession In the time of recession the price of bank shares usually falls, as credit risks and incidents are increasing.default. In addition, it should be remembered that the markets are prone to overreaction, that that in the time of economic downturn the price of the shares of banks, as well as other companies,
could fall more
than those due to economic causes. This could be a good opportunity for the long-term investor, who believes in the recovery of the economy. When markets are undervalued If unjustified panic selling (e.g.,
geopolitical crises, temporary changes in legislation), the price
of bank shares could significantly drop. But such moments may be a good opportunity to buy shares at a profitable price. In periods of stable inflation and low interest rates In periods of low inflation
and moderate interest
rates banks win because of higher demand for loans and lower commercial risks. When the economy is stable, bank stocks also tend to
stable returns. Changes in legislation
The banking sector is strictly regulated. Changes in legislation may affect profitability, for example, because of stricter capital requirements, the introduction of additional regulations or new taxes. Influence of changes in climate and technology The appearance of new financial technologies (e.g., the revolution in the electronic payments area and the increasing requirements for green investments
could change the business models of
traditional banks. Investors should track how the bank adapts to new requirements and the competitive environment. More stronger players often can benefit from the changes and increase their share in the environment .market. Macroeconomic shocks and the economic cycle Economic stagnation, crises and unexpected events, such as pandemics or wars, may negatively affect bank shares. Financial results of banks are tightly related to the economic situation, and prices for bank shares show strong movement in relationship to fund indices. In a declining market the prices of bank shares, as typically declines more than the values of the market indices. This appearance is called the beta factor. But in a growing market investors in bank shares can receive above average returns thanks to the same beta factor.Buying bank shares may make sense for those who are seeking stability and long-term profit, but it is important to select the right time. Periods of recession and market panic often provide the best opportunities, but thorough
analysisoftrendsinthesectorandthefinancialstateoftheparticularbankisrequired.It is worthrememberingthatbankscanbeverydifferent,soitmakessensetofind out,whattheclientportfolioandproductsofa particularbank,therisk profile,capitalizationandcompliancewithregulatoryrequirements.In the end, thedecisionwilldependonthetoleranceoftheinvestortoriskandonhisobjectives.