Multiple media outlets reported this week that legendary investor Warren Buffett was in discussions with senior officials of the Biden administration to provide advice and potentially discuss making an investment in some bank stocks. Buffett and his holding company Berkshire Hathaway (BRK.A 1.18%) (BRK.B 1.30%) are longtime bank investors and know the banking sector extremely well.
In fact, Berkshire actually owned and operated a bank for several years in the 1970s before selling it over changes in banking regulations. Since then it has owned stock in several banks, most notably Bank of America (BAC 3.35%).
After the collapse of three U.S. banks in a matter of days, which triggered a broad sell-off in the sector, will the Oracle of Omaha buy the dip in bank stocks? Let's take a look.
What Buffett has done in the past
There is wide precedent to suggest that Buffett and Berkshire will take advantage of the recent sell-off of banks. For one, during the Great Recession, Buffett injected capital into Goldman Sachs in 2008 and then Bank of America in 2011, both times receiving perpetual preferred stock yielding 10% for Goldman Sachs and 6% for Bank of America.
Image source: The Motley Fool.
During the pandemic, Buffett and Berkshire also made some moves. While Berkshire sold a lot of its bank holdings at the onset of the pandemic, the company would go on to load up on Bank of America. In 2022, Berkshire also made several significant purchases of banks trading below their tangible book value (TBV), or net worth, like Citigroup (C 1.41%) and Ally Financial (ALLY 0.88%).
I'm not sure that Berkshire will do any capital injections, as this recent crisis had more to do with liquidity, and I still think the banking sector overall is much better capitalized and even has better liquidity than it did during the Great Recession. But I do think there is a very good chance that Berkshire makes simpler moves and will purchase common shares of oversold banks during this recent sell-off, or that he may consider buying in the weeks ahead.
What banks would Berkshire be interested in?
I think there is a lot Berkshire could be interested in, given this sell-off. One area is among the super regional banks. Berkshire ditched most of its holdings during the pandemic and recently sold most of its stake in U.S. Bancorp. Some super regional banks are sitting on a good amount of unrealized bond losses, which may have given Berkshire pause, but I still view these super regional lenders as very safe, given their large and much more diverse deposit base.
Leading up to the pandemic, Berkshire also owned PNC Financial Services Group and M&T Bank. These banks have much more minimal unrealized bond losses and now have annual dividend yields of close to 4% or higher. PNC's stock is down more than 17% this year and M&T is down about 12%. Still, Buffett has sold most of his super regional bank stocks over the years. Additionally, Buffett is a long-term investor and regional banks likely will face headwinds following this recent debacle, so I'm really 50-50 on whether or not Berkshire will purchase any of these banks.
I could really see Buffett and Berkshire sticking with some of the larger banks Berkshire has already invested in. One of Buffett's clear favorites, Bank of America, is down 14% this year. The bank does actually have significant unrealized bond losses but has such a diverse deposit base with roughly $1 trillion of consumer deposits. Bank of America will also likely be seen as a safe haven and is currently trading below $30 per share, a level it hasn't touched since late 2020.
Citigroup is another bank I could see Buffett buying more of because I don't think the thesis has changed at all and I expect Citigroup and most large banks to somewhat benefit from the turmoil. More depositors are likely to flock to large banks as a safe haven and more companies are likely to use Citigroup's Treasury products, which are seen as best-in-class. The stock is down about 13% from earlier this month and trades at just 56% of its tangible book value or net worth.
Finally, there have been some rumors that Berkshire is preparing to make some kind of move on Ally Financial after purchasing the stock in two different quarters last year. Ally's stock has fallen more than 28% since early February. However, keep in mind Berkshire already owns 9.9% of Ally's outstanding shares, so moving above 10% will lead to additional regulatory requirements, not that Berkshire hasn't done it before.
Buffett is a proven winner in crises
Given the success Berkshire has had during previous crises, I do think it's very possible that Buffett is deploying capital in some capacity. After all, I do not view this event as the same as the Great Recession and think many banks are going to survive and rebound. It's really hard to speculate on whether or not Buffett's meetings with the Biden administration indicate any kind of more extraordinary move like a capital injection but I could see Berkshire buying shares in large banks it already owns or jumping back into the super regional lenders.
