Warren Buffett. Image source: The Motley Fool.
Since the beginning of 2016, Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) has seen the value of the seven bank stocks in its investment portfolio increase by $5.6 billion, or 10.8%.
That's a lot of money, but when you compare it to how blue-chip bank stocks performed more generally, something interesting sticks out. While Berkshire's portfolio of bank stocks outperformed the S&P 500 this year, it underperformed the main index that tracks bank stocks.
The drag on Buffett's bank stocks
You can see this by looking at the KBW Bank Index, which tracks two dozen of the nation's leading bank stocks. It's up 26.4% this year. That's more than twice the gain Berkshire Hathaway has seen on its bank holdings.
What's the deal? The answer is that not all of the bank stocks selected by Warren Buffett for Berkshire Hathaway's portfolio performed equally well this year. One in particular dragged down its returns: Wells Fargo (WFC 2.01%).
Wells Fargo is Berkshire Hathaway's largest holding in the bank industry -- it's Berkshire's second-largest holding overall, after only Kraft Heinz -- and it was also the one bank stock that barely budged in 2016, left in the dust by most of its competitors.
|
Bank |
Current Value of Berkshire's Holding |
YTD Change (%) |
|---|---|---|
|
Goldman Sachs (GS 1.63%) |
$2,637,956,223 |
33.50% |
|
Bank of America (BAC 1.80%) |
$10,619,000,000 |
32.71% |
|
M&T Bank |
$844,119,154 |
29.37% |
|
U.S. Bancorp |
$4,409,674,577 |
21.47% |
|
Bank of New York Mellon |
$1,008,432,530 |
15.74% |
|
American Express |
$11,284,384,401 |
7.00% |
|
Wells Fargo |
$26,551,631,345 |
1.78% |
Data source: CNBC's Berkshire Hathaway's Portfolio Tracker and YCharts.com.
The culprit for Wells Fargo's lackluster performance can be traced to the revelation in September that thousands of its employees had allegedly opened millions of accounts for customers without customers' authorization to do so. This caused Wells Fargo's shares to lose a fifth of their value and it's why the California-based bank's stock was swimming upstream this year relative to other bank stocks.
Buffett's best-performing bank stocks
Beyond Wells Fargo, the table above also reveals the best-performing bank stocks that Buffett has selected for Berkshire Hathaway's portfolio. This list is topped by Goldman Sachs and Bank of America.
Shares of Goldman Sachs soared 33.5% this year, outpacing all other big-bank stocks with the exception of Morgan Stanley, which is up 34.1% in 2016. The big surge in Goldman Sachs' share price came after the presidential election. The incoming administration's promise to accelerate growth and defang bank regulators has fostered a sense of optimism that Goldman Sachs could soon make significantly more money than it does right now.
With respect to Berkshire's investment in Bank of America, meanwhile, there are a couple of points to note. The first is that Berkshire Hathaway doesn't actually own shares of Bank of America's common stock. It instead owns $5 billion worth of the bank's preferred stock, as well as warrants to purchase 700 million shares of Bank of America common stock at $7.14 a share anytime over the next five years.
It's the latter that's become so valuable, as Bank of America's preferred stock essentially just maintains its $5 billion valuation, though it kicks off $300 million in dividends each year. The warrants, in the meantime, have gone on to be worth $10.6 billion. After you factor in the preferred stock, this means that Berkshire Hathaway's investment in Bank of America has more than tripled in value since it was made in 2011.
The rest of the bank stocks in Berkshire's portfolio have performed admirably as well, with M&T Bank, U.S. Bancorp, and Bank of New York Mellon up double digits on the year. All three of these banks stand to benefit from any uptick in the economy or move to deregulate the bank industry.
The one remaining bank stock in Berkshire's portfolio is American Express, more often thought of as a credit card company. Its underwhelming performance stems from the fact that American Express lost its exclusive deal in 2016 to issue co-branded credit cards with Costco, as well as to be the only credit card accepted by the retailer. This was a huge account for American Express, equating to 10% of its outstanding cards.
In sum, while not all of Berkshire's bank stocks performed equally well, taken together they contributed a $5.6 billion boost to the Omaha-based insurance conglomerate's balance sheet.
