Warren Buffett's companyBerkshire Hathaway (BRK.A 0.63%) (BRK.B 0.60%) maintains a stock portfolio currently valued at more than $323 billion, which it built up over many years of investing.Berkshire invests in stocks across a variety of different sectors, including technology, insurance, and telecommunications. But Buffett and Berkshire always had a spot in their portfolio for bank stocks, and Berkshire Hathaway even owned a bank once upon a time.
While Berkshire sold a number of its bank holdings after the start of the pandemic, the large conglomerate still keeps about one-fifth of its portfolio invested in the sector. Let's take a look.
Bank of America: $35.3 billion (10.9%) of portfolio
Buffett and Berkshire seem to be all in onBank of America (BAC 0.24%), which is now the second-largest bank by assets in the U.S. and the second-largest position in Berkshire's portfolio. Berkshire scooped up billions' worth of the stock even as it was exiting other positions in 2020.
The obvious benefit of Bank of America is that it is a great bank to own in a rising interest rate environment. A lot of its commercial loans see their loan yields reprice as the Federal Reserve raises rates. The bank also has one of the stickiest low-cost deposit bases of any large Wall Street bank. The two together should allow Bank of America to keep growing its profits from loans and securities, even as deposit costs begin to move higher more aggressively.
Bank of America has a large investment banking and trading operation and has done a good job of managing its regulatory capital ratios as well. While several of its peers have had to pause share repurchases to prepare for higher regulatory capital requirements, Bank of America has been able to keep buying back stock.
American Express: $23 billion (7.1%) of portfolio
Berkshire first invested in the credit card and payments companyAmerican Express (AXP 1.64%) in 1993. While you may know American Express for its credit card brand, the company is so much more.
Not only does American Express extend credit card loans, but it also runs a large closed-loop payments network where it helps facilitate transactions between its card members and the many businesses that accept its cards for payments.
American Express collects a fee for every transaction that occurs at its partner merchants accepting its cards, which is similar to how Visa's andMastercard's business models works.
While the payments network is a big differentiator for American Express, the company also has an excellent credit card franchise. Several American Express brands are able to charge annual subscription fees of close to $700 (Platinum card). American Express also regularly attracts higher-income borrowers, which allows it to see lower levels of loan losses than many of its peers.
Bank of New York Mellon/Citigroup/U.S. Bancorp: $8.1 billion (2.5%) of portfolio
I've grouped these three bank holdings in Berkshire's portfolio together because they are smaller holdings, all of which on their own make up less than 1% of Berkshire's total portfolio.
Berkshire has owned both Bank of New York Mellon (BK 0.54%) andU.S. Bancorp (USB 0.36%) for more than a decade. Bank of New York Mellon is a top custodian bank and doesn't take on nearly the same amount of credit exposure through lending as other large banks. Meanwhile, U.S. Bancorp is a top-tier super-regional bank that is currently the fifth-largest bank in the U.S. by assets. Even in today's down market, both stocks trade at large premiums to their tangible book value, or net worth.
In the third quarter, Berkshire made sizable cuts to its stakes in both companies, so it will be interesting to see what happens with U.S. Bancorp and Bank of New York Mellon going forward.
Earlier this year, Berkshire acquired a multi-billion-dollar position in the embattled large bank Citigroup (C 2.56%). Citigroup is in the midst of a multi-year transformation plan after years of lagging returns and regulatory issues. The bank is working to shrink its global footprint and focus on areas of strength. Buffett and Berkshire seem to like the idea, and Citigroup's stock trades at a significant discount to its tangible book value.
Bank of America is an advertising partner of The Ascent, a Motley Fool company. American Express is an advertising partner of The Ascent, a Motley Fool company. Citigroup is an advertising partner of The Ascent, a Motley Fool company. Bram Berkowitz has positions in Bank of America and Citigroup and has the following options: long January 2024 $80 calls on Citigroup. The Motley Fool has positions in and recommends Bank of America, Berkshire Hathaway, Mastercard, and Visa. The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway, short January 2023 $200 puts on Berkshire Hathaway, and short January 2023 $265 calls on Berkshire Hathaway. The Motley Fool has a disclosure policy.
As a seasoned financial analyst and enthusiast with a comprehensive understanding of Warren Buffett's investment strategies and Berkshire Hathaway's portfolio, I can confidently provide insights into the concepts used in the provided article.
Warren Buffett, renowned for his value investing approach, has steered Berkshire Hathaway to build a formidable stock portfolio exceeding $323 billion. The company's diversified investments span various sectors, including technology, insurance, and telecommunications. Notably, despite fluctuations in the market, Berkshire maintains a significant allocation to bank stocks, reflecting Buffett's enduring confidence in the sector.
Now, let's delve into the specific concepts mentioned in the article:
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Bank of America (BAC):
- Portfolio Allocation: Bank of America constitutes a substantial 10.9% of Berkshire's portfolio, valued at $35.3 billion.
- Rationale: Berkshire's strategic investment in Bank of America is underpinned by the bank's resilience in a rising interest rate environment. The article highlights the advantageous aspects, such as commercial loan yield repricing and a robust low-cost deposit base. Bank of America's investment banking and trading operations, coupled with effective capital management, contribute to its attractiveness.
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American Express (AXP):
- Portfolio Allocation: American Express holds a 7.1% share in Berkshire's portfolio, valued at $23 billion.
- Investment History: Berkshire initiated its investment in American Express in 1993.
- Business Model: The article underscores American Express's multifaceted business model, which extends beyond credit card services. Its closed-loop payments network, transaction facilitation, and fee collection from partner merchants contribute to its appeal. Additionally, American Express's ability to attract higher-income borrowers and charge substantial annual subscription fees adds to its strength.
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Bank of New York Mellon (BK), U.S. Bancorp (USB), Citigroup (C):
- Combined Portfolio Allocation: These three banks collectively represent 2.5% of Berkshire's portfolio, with a combined value of $8.1 billion.
- Investment Strategy: Berkshire's long-term holdings in Bank of New York Mellon and U.S. Bancorp, both exceeding a decade, showcase a preference for stable and well-positioned banks. The article notes that even during a downturn, these banks trade at premiums to their tangible book value. Meanwhile, Berkshire's recent multi-billion-dollar investment in Citigroup aligns with the bank's ongoing transformation plan and its discounted stock value relative to tangible book value.
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Market Trends and Berkshire's Moves:
- Market Conditions: The article mentions Berkshire's adjustments to its bank holdings during the pandemic, including selling some positions.
- Future Implications: The notable reduction in stakes for Bank of New York Mellon and U.S. Bancorp in the third quarter raises questions about the future trajectory of these investments. Meanwhile, the acquisition of a substantial position in Citigroup suggests confidence in the bank's strategic transformation.
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Advertising Partners and Disclosures:
- Partnerships: The article discloses advertising partnerships with Bank of America, American Express, and Citigroup, highlighting transparency in financial journalism.
- Individual Positions: The author, Bram Berkowitz, discloses personal positions in Bank of America and Citigroup, along with specific options held. The Motley Fool, the publisher, also discloses its positions and options related to various companies, including Berkshire Hathaway.
In conclusion, Warren Buffett's continued focus on bank stocks within Berkshire Hathaway's portfolio reflects a nuanced investment strategy, emphasizing stability, growth potential, and adaptability to market conditions. The article provides a detailed analysis of specific banks in the portfolio, shedding light on their strengths and Berkshire's evolving investment decisions.
