If you take a quick glance at Berkshire Hathaway's common stock portfolio, it's clear that chairman and CEO Warren Buffett has a soft spot in his heart for financial companies. Not only is Berkshire itself an insurance-dominated conglomerate, but it also holds large positions in some of the nation's leading financial firms, including Wells Fargo, American Express, and U.S. Bancorp, among others.
But if there's one thing we know about the 84-year-old billionaire, it's that his appetite for investing in great companies is insatiable. Indeed, Berkshire is currently sitting on more than $60 billion in cash and equivalents as he eyes his next target.
With that in mind, here are two financial companies the Oracle of Omaha should love.
1. SVB Financial Group (NASDAQ:SIVB)
The market for financial services is incredibly competitive, with thousands of businesses vying against each other to gain market share. In a situation like this, according to Buffett, "only a very low-cost operator or someone operating in a protected, and usually small, niche can sustain high profitability levels."
Enter SVB Financial -- "SVB" stands for "Silicon Valley Bank." The $40 billion diversified financial services company is the bank of choice for the technology industry in the San Francisco area. It's a niche lender, in other words, and an unusually safe one at that.
Unlike most banks that rely on loans to fuel their growth and bottom line, SVB Financial looks more to the provision of services. On its latest balance sheet, only 36% of its assets consist of loans, compared with 60% or more for most traditional lenders. The net result is that SVB Financial has less exposure to credit risk, and thus abject failure, than the typical bank.
The impact was obvious during the financial crisis. While more lending-focused banks such as Bank of America suffered egregious loan losses during and after the crisis, SVB Financial was able to squeak by with comparatively little red ink on its income statement, reporting small losses in the fourth quarter of 2008 and the first quarter of 2009.
2. New York Community Bancorp (NYSE:NYCB)
The second financial company that the Oracle of Omaha should love is New York Community Bancorp, a $48 billion bank focused on the multifamily lending market in the New York City metropolitan area. In fact, this high-yielding regional bank meets both of Buffett's prerequisites.
First off, it's incredibly efficient. Thanks to a business model directed toward large commercial customers, New York Community Bancorp generates more revenue than the typical bank relative to expenses. Whereas most banks spend 60% or more of their net revenue on operating expenses, New York Community Bancorp spends a mere 45%, leaving more cash flow to distribute to shareholders via its atypically generous quarterly payout.
Secondly, New York Community Bancorp operates in a unique niche, supplying capital to the owners of rent-controlled multifamily high rises in New York City. As CEO Joseph Ficalora once explained:
We consider ourselves a niche lender. We lend to a particular kind of owner, on a particular kind of product, at a particular structure that has a very conscious awareness of the actual value of the prescribed cash flow.
So the cash flows in our buildings do not typically go down during the cycle terms. The cash flows in our buildings actually continue to go up even when there are great vacancies in the market place and unemployment is extremely high in the New York market and so on. We in fact see our buildings actually increasing in value because their rent rolls actually increase.
The net result is that New York Community Bancorp, unlike most other lenders, is well-insulated against market downturns. This comes through loud and clear when you look at the bank's loan losses during the financial crisis. While the average big bank charged off nearly 3% of its loan portfolio in 2010, New York Community Bancorp's worst year (2011) saw it write off less than 0.5% of its loans. It's for this reason that the multifamily lender has been one of the market's best-performing bank stocks since it went public in the mid-1990s.
What would Warren do?
Whether or not Buffett ultimately decides to invest in one or both of these two companies obviously remains to be seen. But for the individual investor looking for solid financial companies to invest in, these two provide a great place to start.