Investors have been understandably hesitant when it comes to S&P/ASX 200 Index (ASX: XJO) banks of late.
But legendary investor Warren Buffett has some handy tips for allaying those fears before investing in the sector.
Global bank stocks have been roiled in recent weeks, commencing with the collapse of United States-based Silicon Valley Bank and subsequently Signature Bank.
Regional banks in the US remain under pressure, as the crisis has spread to Europe.
Credit Suisse was the first victim there. The venerable bank was taken over by UBS in a desperate deal engineered by the Swiss government to stave off its collapse. Other European banks, including Deutsche Bank, have also come under pressure.
So, are ASX 200 banks any different?
Here are three tips from Warren Buffett to keep in mind when researching the sector.
Three Warren Buffett tips on how to invest in ASX 200 banks
First, before Warren Buffett invests in any bank stock, he carries out thorough research to ensure it has a good margin of safety. Buying a stock, the Oracle of Omaha says, is just like buying an entire business.
So do your homework!
When it comes to ASX 200 bank shares, you want to make sure they're resilient to any potential liquidity crunch, like those that are rocking some banks in the US and Europe.
The good news here is that the big four ASX 200 banks are reported to be in the strongest shape of any in the world, in terms of their Common Equity Tier 1 (CET1) ratio.
CET1, if you're not familiar, measures the core equity capital of a bank in comparison to its risk-weighted assets.
The Australian Prudential Regulation Authority (APRA) requires the ASX 200 banks to have a minimum 10.25% CET1 ratio. And all of the big four banks handily exceed that level.
Speaking at The Australian Financial Review Banking Summit, APRA chair John Lonsdale said, "Australians can be confident of two things: their banking system is among the strongest and most resilient in the world, with prudential safeguards above and beyond minimum international requirements."
The second Warren Buffett tip for investing in ASX 200 banks is to look for economic moats.
Just like a moat protects a castle, these are companies with existing competitive advantages that make it more difficult for newcomers to come in and steal their businesses. The sheer size of the big four banks and their broad lending reach gives them all solid moats.
Finally, don't expect to double your money overnight.
Warren Buffett recommends investing for the long term.
ASX 200 banks may not be immune to any short-term jitters surrounding the global banking industry.
But with world-leading capital positions and lengthy track records of regular dividend payouts, patient investors who've done their due diligence should reap the rewards in good time.
How have the big banks been tracking?
Here's how the big four ASX 200 banks have performed over the past six months:
