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3 Interesting Things About Warren Buffett's Bank Stock Buys

By Jordan Wathen – Nov 17, 2018 at 9:00AM

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When it comes to bank stocks, Buffett seemingly loves them all.

Warren Buffett's Berkshire Hathaway (BRK.A 1.68%) (BRK.B 2.17%) has a lot of cash in the bank. It also has a lot of cash in bank stocks -- $80 billion in just the banks that make the list of its top 10 stock holdings.

And Buffett isn't done buying more. In a regulatory filing, Berkshire disclosed that it added more banks to its portfolio, building a $4 billion stake in JPMorgan Chase (JPM 3.09%) while increasing its existing billion-dollar bets on Bank of America (BAC 2.95%), U.S. Bancorp (NYSE: USB), and Goldman Sachs (GS).

In perusing his bank stock portfolio, three clear themes emerge.

1. Buffett isn't picky

The banking industry is one where it generally pays to be selective. But Buffett's bank bets are starting to resemble his foray into the airline industry, where he bought billion-dollar stakes in the major airlines, believing that all would perform well, even if he couldn't pick which one would perform best.

Bank Stocks Owned by Berkshire

Market Value of Berkshire's Holdings

Bank of America

$25.8 billion

Wells Fargo

$23.3 billion

American Express

$16.1 billion

U.S. Bancorp

$6.6 billion

Goldman Sachs

$4.1 billion

JPMorgan Chase

$4.0 billion

Total

$80.0 billion

Data source: 13F filing.

Berkshire Hathaway's bank portfolio looks a lot like the banking industry, as it owns a billion-dollar stake in five of the seven largest U.S. banks by assets. Of the five largest banks Berkshire Hathaway owns, all but perhaps Goldman Sachs could be considered rather boring, plain-vanilla banks that take deposits and make loans on a large scale.

I take Berkshire's almost index fund-like approach to the banking industry as a clear sign he likes all large banks, possibly all banks, at current market prices. (Beyond the money center banks, smaller banks are simply too small for Buffett to put serious amounts of money to work buying their shares.)

Letters spelling out "bank" on a stone building facade.

Image source: Getty Images.

2. Buffett likes American banks

Buffett's bank holdings closely match the largest U.S. banks, so what he doesn't own is perhaps as interesting as what he does.

There's one glaring exception in Berkshire's bank holdings: It owns all big four U.S. banks, except for Citigroup (C 2.14%). That may be due to Citi's international footprint, given the bank generates a majority of its revenue and profit from its operations overseas (only about 37% of segment profits are earned domestically).

Citi's U.S. business largely consists of credit cards and retail and corporate banking in major metropolitan areas. With a retail footprint mostly in the largest metropolitan areas on the coasts, Citi looks nothing like Bank of America, Wells Fargo, or JPMorgan, which dot the map and touch a majority of U.S. states. Berkshire already has ample exposure to U.S. credit cards thanks to its outsize stake in American Express.

Despite trading for the lowest multiple of tangible book value of any of the big four banks, the famed value investor doesn't have a dime in Citi.

3. Buffett likes "too big to acquire" banks

Second only to making bad loans, the primary way banks get into trouble is by overpaying to acquire their rivals. Banking history is littered with deals gone bad, many of them done by the banks that make up a healthy chunk of Berkshire Hathaway's portfolio (think Bank of America buying Countrywide Financial, or JPMorgan Chase buying Bear Stearns).

Today, though, many of the banks in Berkshire's portfolio are actually too big to grow by acquisition, which eliminates one of the biggest risks of owning a bank. Bank of America, JPMorgan Chase, and Wells Fargo all control roughly 10% or more of the nation's deposits, which prohibits them from making any big deals to acquire other depository institutions.

Given the current regulatory framework, big banks are boxed in. They can either retain their earnings to grow, pay dividends, and/or repurchase stock, subject to approval by the Federal Reserve.

Well-capitalized, more strictly regulated, and too big to make acquisitions, investors have often argued that the big banks have become almost utility-like in nature. Buffett seems to have adopted that view, too.

Jordan Wathen has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

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Stocks Mentioned

Citigroup Inc. Stock Quote
Citigroup Inc.
C
$42.56 (2.14%) $0.89
Bank of America Corporation Stock Quote
Bank of America Corporation
BAC
$31.09 (2.95%) $0.89
The Goldman Sachs Group, Inc. Stock Quote
The Goldman Sachs Group, Inc.
GS
$299.15 (%)
JPMorgan Chase & Co. Stock Quote
JPMorgan Chase & Co.
JPM
$107.73 (3.09%) $3.23
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.A
$413,300.00 (1.68%) $6,830.00
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.B
$272.80 (2.17%) $5.78

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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