Everyone knows that famed investor Warren Buffett, chairman and CEO of Berkshire Hathaway (BRK.A -0.32%) (BRK.B -0.66%), loves banks. The company's portfolio is rife with them. Plus, Berkshire just made three large investments in Bank of America (BAC -0.03%) -- together constituting one of Buffett's biggest moves during the coronavirus pandemic.
Because the banking sector is so closely tied to the economy, the industry has fared worse than others. The KBW Bank Index, which tracks large bank stocks, is still down more than 31% since late February. With two full quarters of the pandemic now in the books, I figured it would be a good time to look at which of Buffett's banks are performing best through the pandemic.
I chose to focus on the top five bank holdings: Bank of America, American Express (AXP -0.21%), Wells Fargo (WFC -0.60%), JPMorgan Chase (JPM -0.11%), and U.S. Bancorp (USB 0.99%). I then ranked the banks in order based upon earnings performance on a year-over-year basis, stock price since the beginning of 2020, and allowance for loan losses to ensure banks are being conservative enough.
Image source: The Motley Fool.
1. Bank of America
Buffett has recently thrown his full support behind America's second-largest bank by assets, and it's now the second-largest holding in Berkshire's portfolio. Despite incredibly difficult economic conditions, Bank of America turned a $7.5 billion profit in the first two quarters of the year. That's down 49% from its performance in the first half of 2019, but still better than many other Buffett bank holdings.
Hurting Bank of America's earnings was the roughly $10 billion it set aside to cover potential loan losses. The bank has now set aside enough cash to cover potential loan losses amounting to 1.96% of its total loans. This actually looks a bit light compared to some of its peers, but it doesn't really matter because Bank of America has such a strong capital position. It could take tens of billions of losses on loans and still maintain solid capital ratios. Its stock price has declined by roughly 29% since the start of 2020.
2. JPMorgan Chase
Berkshire only held about 3% of outstanding shares in JPMorgan at the end of the first quarter , which pales in comparison to the company's now 11.8% ownership stake in Bank of America. But this is certainly a bank that has performed well during the pandemic.
The bank turned a roughly $7.6 billion profit through the first half of the year, which is down 60% from the same time period in 2019. But it did this while setting aside close to $19 billion in the first two quarters to cover potential loan losses. The bank's record $33.8 billion in total revenue in the second quarter, spurred by massive trading revenues, helped offset the huge provisions.
JPMorgan's CEO Jamie Dimon continues to show he can run America's largest bank profitably even during times of economic stress. The bank has set aside total cash for potential loan losses amounting to 3.32% of total loans, a very healthy allowance. Its stock price is down more than 31% since the beginning of the year, but don't be surprised if Buffett boosts his stake in JPMorgan during the second quarter or following the bank's recent earnings report.
3. U.S. Bancorp
A $547 billion bank, U.S. Bancorp is a good deal smaller than Bank of America and JPMorgan. Interestingly, the bank reported six-month earnings of nearly $1.9 billion, which is only down 47% from the same six months of 2019. That's a smaller decline than both of America's top two banks. But U.S. Bancorp's stock is down roughly 39% since the beginning of the year, which is much more than either of Bank of America or JPMorgan.
The severity of this drop likely stems from the fact that U.S. Bancorp doesn't have the level of investment banking and trading revenue needed to offset struggles in its traditional bank segments like JPMorgan or Bank of America do. Still, the bank has set aside enough cash to cover losses amounting to 2.54% of total loans, a very healthy level, and has a strong capital position as well.
4. American Express
With its heavy reliance on credit card loans and the travel industry, it's not a huge shock to see American Express, Buffett's second-largest bank holding at the end of the first quarter , struggling during the pandemic. The bank's six-month profit of $624 million is down 81% from the first half of 2019.
However, given the composition of the company, investors appear somewhat impressed, as the stock has only fallen about 25% since the beginning of the year. Investors may simply be pleased to see the company turning any profit at all during such a tumultuous time. The company has set aside enough cash to cover losses amounting to 8.8% of total loans.
5. Wells Fargo
Once considered Buffett's favorite bank, it is also no surprise to see Wells Fargo last on this list. The company reported a loss of more than $1.7 billion through the first six months of the year, down from a more than $12 billion profit for the same period last year. The stock is down about 55% from the start of the year.
The bank cut its quarterly dividend by about 80% for the third quarter, and regulatory restrictions have made it difficult for the bank to generate sufficient revenue. It will be interesting to see if Buffett made any moves regarding his position in Wells Fargo during the second quarter.
