Which Billionaire Investor Has the Right Idea on The Big Banks?

Big money managers George Soros and Warren Buffett have split on their respective willingness to own mega-banking stocks. It may reflect the stark difference in the underlying business models of these institutions.

May 22, 2014 at 7:00AM

Blindly following moves by the largest money managers isn't advised; however, investors may gain valuable insight by looking behind the headlines when 2 fund manager titans have divergent views on stocks in the same industry.

While billionaire George Soros saw his Soros Fund Management LLC dumped positions in banking giants JPMorgan Chase (NYSE: JPM), and CitiGroup (NYSE: C), Warren Buffett's Bershire Hathaway Group continued to hold huge stakes in Wells Fargo & Co. (NYSE: WFC) and US Bancorp (NYSE: USB).

Why such differing outlooks?

Buffett

Wall Street versus Main Street banks
Behemoths Citigroup (NYSE:C) and JPMorgan Chase (NYSE:JPM) run worldwide empires reviled for exotic, financially engineered products, rapid-fire trading desks, and expensive miscues. These are among the "Wall Street banks." Some pundits argue that no one can really understand the inner workings; not even top management. They are not only "too big to fail," but perhaps "too big to manage."

However, institutions like Wells Fargo & Co. (NYSE:WFC) and US Bancorp (NYSE:USB) never strayed from traditional "Main Street" banking business models.

Management emphasizes taking in customer deposits, and making sound community loans and mortgages. In addition, these 2 banks have little overseas exposure.

Here's a simple proof challenge: go read the "Overview" section of the most recent 10-Q filing for JPMorgan Chase and CitiGroup. Then try to explain to a novice how these institutions make money. Warren Buffett once quipped he only invests in companies "that don't take a genius to run."

Citigroup: troubles in the U.S. and Mexico
Citi took a confidence hit when Federal regulators rejected its 2014 shareholder return-of-capital plan. CEO Michael Corbat said the bank would wait until next year before resubmitting a new capital plan, thereby precluding current investors from a higher dividend or a more robust share-repurchase program now.

In late February, Citigroup's Banamex unit in Mexico made the news when it alleged the unit had been defrauded by an oil-services company, causing losses of as much as $400 million and forcing the bank to restate 2013 results.

Soon after, Citigroup reported it had discovered a smaller potential fraud at another company that dealt with Petróleos Mexicanos, or Pemex, Mexico's state-owned oil company.

Soros opened a CitiGroup position in 2010.  He's now exited all shares.

J.P. Morgan Chase: fines upon fines
The 2012 "London Whale" fiasco caused a stir, costing the bank about $6.2 billion, along with another $1 billion regulatory fine. Two former traders became targets of criminal charges. The mishap tarnished the image of CEO Jamie Dimon, with Wall Street now questioning whether Dimon (or anyone else for that matter), can run the far-flung operation.

According to New York Post, as many as 10,000 more job cuts are planned for 2014 in addition to previously announced layoffs; a result of shrinking business lines and heavy regulatory oversight.

In October 2013, JPMorgan Chase reported its first quarterly loss during the Dimon tenure, with results weighed down by $7.2 billion in legal costs. Then the bank missed 2014 first quarter earnings big-time.

Soros

Source: Wikipedia / Harald Dettenborn.

Evidently, Soros Fund Management LLC had seen enough.  Despite just adding JPMorgan shares in 4Q 2013, the fund ditched all shares at the end of March.

US Bancorp: a different story
This bank is known for a long history of conservative management and prudent underwriting standards.

In 2008, US Bancorp didn't need Federal Trouble Asset Relief Program money, but took $6.6 billion after pressured to do so, then paid it back immediately when afforded the chance.

Since that event, the most newsworthy item around the bank is....there isn't any news. This is just the way Warren Buffett likes it. He added more shares as reported in the most recent 13-F filing.

USB simply builds its deposit base, makes good loans, and collects bank fees. In turn, senior leadership rewards shareholders with a steadily rising dividend and aggressive stock repurchase plan. US Bancorp targets 60-80% of its earnings to shareholder return-of-capital.

Wells Fargo & Co.: Buffett's darling
Wells Fargo equity is Warren Buffett's biggest investment; and Mr. Buffett is Wells' biggest shareholder. He has afforded management consistent praise. Indeed, Wells Fargo used the financial crisis to build assets, including stealing Wachovia Bank right out from under CitiGroup. By most measures, Wells' has become the nation's best megabank. Management targets 40% of earnings to a cash dividend, and an additional 15-35% to share repurchase.

Similar to USB, investors learned Wells' didn't want or need Federal bailout money, either.

Big banking's little $20.8 trillion secret
There's a brand-new company that's revolutionizing banking, and is poised to kill the hated traditional brick-and-mortar banks. That's bad for them, but great for investors. And amazingly, despite its rapid growth, this company is still flying under the radar of Wall Street. To learn about about this company, click here to access our new special free report.

Raymond Merola owns shares of US Bancorp and Wells Fargo. Please do your own careful due diligence before making an investment. The Motley Fool recommends Wells Fargo. The Motley Fool owns shares of Citigroup, JPMorgan Chase, and Wells Fargo and has the following options: short June 2014 $50 calls on Wells Fargo and short June 2014 $48 puts on Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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