At Berkshire Hathaway's (BRK.A -0.39%) (BRK.B -0.37%) recent shareholder meeting in Omaha, CEO Warren Buffett and Vice Chairman Charlie Munger had quite a bit to say about the state of the banking industry.
Specifically, Buffett said that the recent bank failures had created fear, and because fear can be contagious, he wasn't certain if the period of consumer and investor panic in the sector was over. And while Munger is generally a fan of banking, he said that bankers are starting to distort some of the lessons learned from the 1929 crash.
We also learned from Berkshire's first-quarter earnings report that the company was a net seller of financial sector stocks during that period to the tune of nearly $2 billion. Buffett specifically mentioned Bank of America (BAC -1.71%) at Berkshire's meeting as a bank he's sticking with, but investors largely expected to learn that Berkshire had otherwise bailed on the banking industry.
2 bank stocks Berkshire Hathaway just bought
Berkshire Hathaway recently submitted its 13-F filing to the SEC, detailing what was in its stock portfolio as of the end of the first quarter. And many investors were surprised to learn that Berkshire actually bought shares of two different banks during Q1.
First, Buffett was serious about sticking with Bank of America. The conglomerate added 22.8 million shares (at a market value of about $615 million) to its Bank of America stake during the first quarter, bringing its ownership stake to more than 12.9%.
Second, Berkshire opened a new position in Capital One (COF -1.93%), with a stake worth about $954 million as of May 16. This is a relatively small investment by Berkshire's standards at about 0.3% of its equity portfolio, but the decision to add a new bank stock to its holdings is certainly significant given the conditions in the industry.
Buffett sold these three bank stocks
It's worth acknowledging that while Buffett and his team invested about $1.5 billion in bank stocks during the first quarter, it was indeed a net seller of bank stocks.
For one thing, Berkshire slightly trimmed its investment in Ally Financial (ALLY -3.02%), selling about 2% of its shares in the auto-focused lender. However, it's worth noting that Berkshire owns more than 9.6% of Ally, and since the bank buys back its own shares frequently, that could have been a move to ensure the conglomerate's position remains under the 10% level at which additional regulations kick in for stakeholders.
More notably, Berkshire completely exited its positions in both U.S. Bancorp (USB -1.79%) and Bank of New York Mellon (BK -0.87%) during the quarter. These banks had been in Buffett's portfolio since 2006 and 2010, respectively, but Berkshire had begun selling shares of both in recent quarters, so the exits weren't particularly surprising.
Why did Buffett and his team make these moves?
It does appear that Buffett has soured on regional banks, at least those with traditional banking models like U.S. Bancorp. And Munger specifically called out investment banking as something he isn't too excited about these days. Also, Bank of New York Mellon has one of the highest percentages of uninsured deposits (92%) in the industry. That could have had something to do with Berkshire's decision to exit its stake.
As far as the purchases go, Buffett's admiration for Bank of America and its management team is well-known, so it isn't too surprising that Berkshire added to that position.
Capital One was certainly the big surprise of the quarter, but it's not hard to see why Buffett likes it. It has an extremely low valuation (about 0.7 times book value) at the moment, but has a highly profitable business model due to the large concentration of high-interest credit card debt in its loan portfolio. And while Capital One's net charge-off rate has ticked higher in recent quarters, it's still not excessive on a historical basis, and the bank has more than enough set aside in loan-loss reserves. It trades for just 6.7 times forward earnings despite an above-average net interest margin.
Having said all of that, it's important to point out that we don't know for sure exactly why Buffett (or others at Berkshire) made any of these moves. He is notoriously quiet when it comes to explaining most of his investment decisions. But one thing is pretty clear -- Buffett's preferred banking models may have shifted, but he isn't ready to give up on the industry.
