Renowned value investor Guy Spier has said U.S. regional banks are a “potential minefield” in the current market environment. Spier, who calls himself an “ardent disciple” of legendary investor Warren Buffett, told CNBC’s Pro Talks Wednesday that he saw risks in regional banks after Moody’s downgraded several of them this week. The rating agency warned that banks with substantial unrealized losses that are not captured by their regulatory capital ratios may still be susceptible to sudden losses of market or consumer confidence in a high-interest rate environment. Moody’s left the larger banks’ ratings unchanged. Spier, who manages the $350 million Aquamarine Fund, warned that regional banks have become a “potential minefield,” and could be at risk of losing deposits to larger banks offering higher interest rates or which are perceived to be safer. Consolidation risks Spier explained that his view stems from the fact that the U.S. banking system remains highly fragmented, with around 12,000 banks nationwide. This contrasts sharply with more consolidated banking systems like the U.K., which has only four major banks. According to Spier, this means the U.S. banking industry is undergoing a “very slow, gradual consolidation,” with the profits being divided among fewer and fewer banks over time. While not a “massive advantage,” Spier believes larger money center banks like Bank of America have a slight edge in profitability over regional banks. He added that when regulators impose extra capital requirements on the largest banks, it can diminish this gap temporarily. “So when you find a place where there’s kind of like this profit pool, and it doesn’t seem to be going away, and actually is getting slightly better over time, I think it’s a really, really nice place to be,” Spier said, reflecting his preference to own Bank of America shares. Moody’s decision to downgrade regional banks while leaving money center banks unchanged “kind of tilts the playing field a little bit” in favor of the large banks, funneling more profits their way, according to Spier. Technology threat Aside from the risks highlighted by Moody’s, Spier suggested that technology and innovation also pose major threats to regional banks. Large banks have more resources to invest in new technology at scale, he said, while smaller regional players will find it harder to keep up. “It’s far harder for a smaller regional bank to get on top of technology than it is for one of the larger money center banks who have far more scale, even though it’s very difficult for the larger money center banks as well,” Spier added. Why own Bank of America? Spier says he owns Bank of America shares because he believes banks benefit from a “close symbiosis” with the Federal Reserve and the U.S. government to implement monetary policy in the country. Money center banks are also partly immune from deposit flight risks as these institutions primarily raise funding from international capital markets at lower rates than is available to regional banks. While not as strong as in the past, Spier said this interdependency gives banks like BofA a “significant” competitive edge that “works its way into the whole of the U.S. economy and the global economy.” When asked why he’s chosen to invest in Bank of America over peers such as JPMorgan or Citi , the investor said his position stems from an investment made during the global financial crisis. “I actually bought TARP warrants, which were an extremely cheap way to own them,” he said, referring to a type of esoteric securities that gave investors the right to own Bank of America shares at a set price in the future. The Troubled Asset Relief Program (TARP) was a significant part of the bailout of major banks during the financial crisis. “I ended up just continuing to own them,” Spier told CNBC, adding that he aims to hold investments like Bank of America stock for the very long term.
This story originally appeared on CNBC
