Banks make money by borrowing from depositors (at 1%) and lending to business (at 5%). A bank's net revenue is the amount of loans they make times the interest rate spread (LOANS*4%).
Typically loan officers have incentives to make as many loans as possible, ignoring the potential for default. Although banks must raise equity to cushion against the risk of loan default, it is only 10.5% of the value of its loans. When loans go bad, this erodes some of the owners' capital, which can cause a sharp drop in the bank's stock price. Fixing this is hard because loan performance may not be realized until years after the loan is made.
Nate Tobik, founder of Completebankdata.com, told Benzinga’s PreMarket Prep hosts Friday that Bank of Ozarks has been his favorite short idea for about a year now.
“I think it’s going to be a zero once we hit a recession, and you can ride it all the way down,” he said.
DISCLAIMER: THIS IS FOR TEACHING PURPOSES ONLY. IF I REALLY KNEW WHAT WAS GOING TO HAPPEN, I WOULDN'T BE TEACHING SCHOOL AND I PROBABLY WOULDN'T TELL YOU.