Warren Buffett's company Berkshire Hathaway (BRK.A -1.63%) (BRK.B -1.66%) recently filed its 13F form with the Securities and Exchange Commission (SEC), detailing which stocks the large conglomerate bought and sold in the first quarter of 2023.

Notably, Berkshire eliminated its stake in Bank of New York Mellon (BK -1.24%), one of the largest custodian banks in the world. Berkshire first bought a stake in Bank of New York Mellon in 2010 and did a bunch of buying and selling while it owned the stock.

Berkshire trimmed its position by about 18% at the very beginning of the pandemic but then kept it steady until the third quarter of 2022, when Berkshire began the selling that would eventually eliminate the longtime holding. Let's take a look at why Buffett and Berkshire may have soured on the stock.

Warren Buffett.

Image source: Motley Fool.

There's a lot to like

Although banks in general tend to benefit from rising interest rates, the Fed's rate hiking cycle over the last year has been faster than anything most were prepared for. Banks benefited last year but are now feeling the sting of higher funding costs, especially after the failures of several regional banks earlier this year. This rise in funding costs has dragged down banks' net interest income or revenue, the money banks make on loans and securities after funding those assets.

However, Bank of New York Mellon has seen its net interest revenue hold up much better than the industry average. Net interest revenue in Q1 rose 7% from the sequential quarter and is up 62% year over year. Meanwhile, management on the company's earnings call maintained its outlook for a 20% rise in net interest revenue in 2023 from last year. Doing this after the banking crisis would be quite impressive. Executives also said they have positioned the bank "for continued interest rate volatility and retain ample flexibility and liquidity to respond to a wide range of outcomes as the ultimate impact of continued tightening remains uncertain."

Another thing investors might like about Bank of New York Mellon is that loans make up only about 14.6% of total assets, making it a less risky bank to own during a recession. Now, the bank does have a large securities portfolio and therefore a significant amount of unrealized losses in its books. However, unrealized losses among bonds that the bank plans to sell before maturity are already included in the bank's regulatory capital ratios, unlike some larger regional banks, and management plans to continue to repurchase stock this year.

Furthermore, roughly two-thirds of the bank's deposits are operational, meaning clients are really using the bank for purposes other than just storing deposits or seeking yield, which has made the deposits a lot stickier.

Why Buffett and Berkshire are no longer interested

There are several possible reasons Buffett and the investing team at Berkshire are no longer interested in the stock.

A lot of what drives fee revenue at Bank of New York Mellon is market sentiment, which can be fueled by market levels and investment sentiment. Bank of New York Mellon Chief Financial Officer Dermot McDonogh on the company's first-quarter earnings call said that clients took a risk-off approach in Q1, which drove lower client volumes and fees.

We know that Buffett recently said at Berkshire's annual meeting that the "incredible period" for the U.S. economy has been winding down over the last six months, and if Buffett is worried about the market, then Bank of New York Mellon may not be the type of business Berkshire wants to own right now.

Another possibility is that Berkshire may think Bank of New York Mellon is fairly valued or overvalued, with the stock currently trading at 174% of its tangible book value. Although Bank of New York Mellon stock has fallen about 11% this year, it still trades at a high valuation for the sector. 

It's also entirely possible that Buffett and Berkshire do not see any glaring issues with the company but would prefer to deploy money elsewhere or lower its exposure to the banking sector. Ultimately, Berkshire's sale of the stock does not erode my opinion of Bank of New York Mellon. I think it's a fine business and a lower-risk bank stock to own if there's a recession, but I also see better opportunities. It really comes down to your investing strategy and financial goals.