Since the pandemic began in early 2020, Warren Buffett and his company Berkshire Hathaway (BRK.A -0.34%) (BRK.B -0.01%) have mostly been selling bank stocks, not including Bank of America (BAC 1.70%). The Oracle of Omaha abruptly changed his position on large behemoths like Goldman Sachs and JPMorgan Chase, with Berkshire quickly eliminating its positions in those banks in just a few quarters, while also all but eliminating the company's position in one-time favorite Wells Fargo (WFC -0.26%).
While I can't say I completely understand the moves, nor can I predict what one of the greatest investing minds ever will do next, I think Buffett and Berkshire may be done investing in banks for a while. Here are five reasons why.
1. Buffett seems to have his final roster
Throughout the pandemic, Buffett, a longtime bank stock investor, didn't abandon banks altogether, but rather got more selective about which banks he held. For instance, Berkshire completely dumped JPMorgan Chase and invested $2 billion more into Bank of America, of which he now owns close to 12% of outstanding shares. That makes Bank of America look like Buffett's mega bank of choice. Berkshire also clung tight to credit card company American Express (AXP 2.56%), a brand he has called "special," while eliminating his position in another credit card company, Synchrony Financial, making American Express look like his credit card company of choice.
The same can be seen in Berkshire's other moves. Berkshire eliminated all of its regional bank holdings except U.S. Bancorp and then also held onto Bank of New York Mellon, the massive custodian bank. While I don't know that Buffett did this intentionally, he appears to have selected one bank in each bank subcategory, which makes me believe that Buffett and Berkshire have their final roster of banks set for a while.
Image source: The Motley Fool.
2. He's right-sizing the risk
Many people wondered about why Buffett was selling so many of his bank holdings. Buffett assured people that he felt much better about the U.S. banking sector than he did 10 or 15 years ago. "I like banks generally, I just didn't like the proportion we had compared to the possible risk if we got the bad results that so far we haven't gotten," Buffett said at Berkshire's annual shareholder meeting earlier this year. "We overall didn't want as much in banks as we had."
Just like I think he has a final roster, I also think Buffett now has the final proportion and percentage of banks he wants in his $308 billion equities portfolio. What makes me think this? Well, for one, the outlook for banks has brightened considerably over the last few quarters. Banks have also showed through the Federal Reserve's stress testing exercises and by their performance in 2020 that credit quality and loan underwriting has greatly improved from the Great Recession and can survive and make money during a severe recession. Yet Buffett hasn't purchased any new bank stocks or increased any positions in the past couple of years other than Bank of America in 2020.
I find Buffett's moves on U.S. Bancorp to be particularly interesting. Berkshire has now trimmed its position in the stock slightly over the last few quarters as U.S. Bancorp has reduced its own share count, maintaining a stake in the bank equivalent to roughly 8.6% of U.S. Bancorp's outstanding shares.
3. Valuations are high
Most investors value banks on a price-to-tangible-book value basis, looking at a bank's market cap or share price compared to its tangible book value, which is a bank's equity minus its intangible assets and goodwill. TBV tells you what a bank would be worth if it were to be immediately liquidated. Here is where Buffett's banks recently trade on a price-to-TBV basis.
| Bank | Price-to-TBV |
|---|---|
| American Express | 516% |
| Bank of America | 192% |
| Bank of New York Mellon | 211% |
| U.S. Bancorp | 251% |
Data source: Ycharts, company filings.
For some perspective, any bank that trades at 200% to TBV is considered very strong, especially now when you consider that banks are coming out of one of their toughest years in a decade, there has been very little loan growth over the last year, and interest rates are at all-time lows. Now, I think bank stocks can go higher, given how strong the sector looks right now. But Buffett has historically been a value investor, so it would strike me as an odd time for him to begin taking positions in new banks with valuations high right now, relative to where they've been historically over the last decade. I think he already would have done his buying a few quarters ago if he had any interest.
4. Buffett isn't the only one pulling the strings
It's no secret that the 90-year-old Warren Buffett is no longer Berkshire's only big investor -- and no I am not referring to Berkshire's vice chairman Charlie Munger. It's well known that Berkshire's investment officers Ted Weschler and Todd Combs have free rein to invest as they see fit, and they don't seem to have much appetite for shares of companies in the traditional commercial banking sector. Combs is even on the board of directors at JPMorgan Chase, but Berkshire still completely dumped its stock in 2020. Instead, Buffett's new investing lieutenants have embraced opportunities that Buffett traditionally may not have pursued, as can be seen with Berkshire's investment in the initial public offering of the cloud computing data company Snowflake.
5. He may be focusing on digital banking
Buffett may be 90, but he's still a sharp guy and a savvy investor. I'm sure he recognizes to some extent that digital banking and fintech is the future and many traditional commercial banks have fallen behind. In June, Berkshire invested $500 million into a Brazilian digital bank called Nubank that boasts 40 million customers and is reportedly heading for an initial public offering. It's hard to say whether this was Buffett's personal investment, as he didn't comment directly about it. However, it is Berkshire's second Brazilian fintech investment. In 2018, the conglomerate bought 14 million shares of the payments company StoneCo. So, perhaps the traditional banking sector has fallen more out of favor with Buffett than we realize.
