Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) has spent much of the past year selling its bank holdings, and the company's latest form 13F filing shows it did more of that in the fourth quarter. Berkshire's chairman and CEO, Warren Buffett, has long been a big fan of bank stocks. But since the coronavirus pandemic, Buffett, or perhaps some of the other top investment managers running Berkshire's portfolio, seem to have soured on the industry (other than their huge investment in Bank of America, which I'll discuss more shortly).
Buffett and Berkshire made three big bank moves in the final months of 2020. Here's what you need to know about them.
1. Eliminated JPMorgan Chase
In the fourth quarter, Berkshire sold off its remaining stake in America's largest bank by assets, JPMorgan Chase. The move was not exactly a surprise after Berkshire eliminated most of its stake in JPMorgan in the third quarter -- Buffett himself has said that when Berkshire sells a stock, it's very often going to be the entire stake. But the move represents a sharp reversal.
Berkshire had built up an $8.3 billion stake in JPMorgan at the end of 2019, and Buffett has long praised the bank's CEO, Jamie Dimon. In a CNBC interview in 2019, Buffett called himself "dumb" for not buying the stock earlier and said he thought JPMorgan deserved to be trading at 3 times tangible book value (its multiple was a little under 2 at the time). JPMorgan also proved itself quite resilient during the pandemic, generating more than $29 billion in earnings in 2020, despite all of the challenges.
But the real decision to exit JPMorgan may be somewhat linked to Buffett's heavy investment in Bank of America. Last July and August, Buffett plowed more than $2 billion into BofA, raising Berkshire's stake in the company to roughly 12% of its total outstanding shares. Furthermore, the Federal Reserve has granted Buffett permission to raise Berkshire's stake to as much as 24.9%.
Buffett at his core is a value investor, meaning he generally looks for stocks that seem underpriced relative to their intrinsic value, or in a bank's case, its tangible book value. In his recent buying spree, Buffett purchased shares of Bank of America when they traded at a much lower valuation and much closer to tangible book value than JPMorgan, so Buffett may view Bank of America as having more upside long term.
2. Continued to trim Wells Fargo
Buffett's longtime love affair with Wells Fargo, a bank he first bought back in 1989, looks to be approaching an end. Berkshire continued to significantly curb its position in the bank, selling close to 75 million shares in the fourth quarter and whittling Berkshire's position down to roughly 52.4 million shares, valued at $1.58 billion. Consider that in 2016, Berkshire owned 500 million shares of Wells Fargo worth roughly $27 billion.
Buffett has not been pleased with Wells Fargo since its phony accounts scandal, in which employees at the bank fraudulently opened millions of unauthorized accounts on behalf of its customers. The numerous fines and punishments that came with the scandal have significantly hurt the bank's profitability. In 2020, Wells Fargo significantly underperformed its peers and cut its dividend by 80%. While many investors believe the bank could have a big turnaround in the works, it seems that Buffett has finally had enough, especially as he gets more selective with banks. Expect to see Berkshire eliminate its position in Wells Fargo over the next few quarters.
3. Exited most regional banks
Buffett's selectivity also seems to apply to the regional bank space. In the fourth quarter, Berkshire eliminated its positions in PNC Financial Services Group and M&T Bank, while mostly maintaining its position in U.S. Bancorp.
All three have historically been top performers in the regional space. However, Buffett may feel that regional banks face a tough road ahead, especially against their bigger peers. The low-interest rate environment hurts their loan margins, and the need to digitize and automate operations is becoming more imperative than ever before. Regional banks also don't have the same level of investment banking operations as large banks like Bank of America, JPMorgan, and Citigroup.