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Warren Buffett Guarantees Safety of US Banks, But Has 3 Favorites

Holly LaFon

255 followers
Warren Buffett appeared on Bloomberg this week personally guarantee the safety of U.S. banks. Though Buffett doubtless has a thorough method for valuing banks, he mentioned three signs in particular of their growing strength coming out of the financial crisis. “The banks will not get this country in trouble, I guarantee it,” he said. “The capital ratios are huge, the excesses on the asset side have been largely cleared out… we own bank shares and I personally own stock in banks... I do not see problems in these things.”

Buffett also praised the banks for their large deposit bases, saying that that is fundamentally where their earnings are going to be driven from.

While Buffett has not revealed Berkshire Hathaway (BRK.A)(BRK.B)’s fourth quarter portfolio yet, his third quarter holdings show just three banks worthy of inclusion in the portfolio: Wells Fargo (WFC), M&T Bank Corp (MTB) and U.S. Bancorp (USB). Together, they have a 22.8% weighting in it.

Wells Fargo (WFC)

Of his three bank holdings, Buffett has been purchasing Wells Fargo the most aggressively by far. Between the first quarter of 2009 and the third quarter of 2012, he has amassed 12,230,677 Wells Fargo shares at prices ranging from about $16 to $34. In total he has 422,549,545 shares, or 8.03% of the company.



According to its fourth quarter results announced today, Wells Fargo had the following levels for the three salient metrics Buffett mentioned in the interview indicated the strength of banks:

Capital ratios

Tier 1 common equity: 10.12%, compared to 9.46% a year previously

Tier 1 capital: 11.75%, compared to 11.33%

Total risk to assets: 11.17%, compared to 10.78%

Total average core deposits: $928.8 million, compared to $864.9 million

Nonperforming assets: $24.5 billion, compared to $25.3 billion in the third quarter 2012

Wells Fargo also has had a revenue growth rate of 9.8% and EBITDA growth rate of 4% annually over the past five years. Book value grew at 14.6% over the past five years.

M&T Bank (MTB)

Buffett’s stake in M&T Bank predates 2010. He sold almost 1.5 million shares of the stake in the first half of that year, and didn’t touch the holding again until he added 18,219 shares in the third quarter of 2011. With no further trades since then, he owns a total of 5,382,040 shares, or 4.2% of shares outstanding.



With approximately $78 billion in assets, M&T Bank is one of the nation’s 20 largest commercial bank holding companies, with over 700 domestic branches in seven states.

As of Sept. 30, 2012, M&T has the following levels for Buffett’s three metrics:

Capital ratios

Tier 1 common ratio: 7.47%, compared to 6.87% a year previously

Total tangible common equity to tangible assets: 7.04%, compared to 6.65% a year previously

Total deposits: $64 billion, compared to $59.5 billion

Nonperforming assets: $1.04 billion, compared to $1.26 billion

MTB has also in the past five years grown revenue at a rate of 4.4%, free cash flow at 18.6% and book value at 6%, annually. Its EBITDA has over the past five years declined at an annual rate of 0.3%.

U.S. Bancorp (USB)

Buffett’s position in USB predates 2008. When he added 4,306,100 in the third quarter of 2008, he rid himself of the shares and then some in the next quarter. He added almost 1.5 million more in the first quarter of 2009 when the price plunged to $15 per share, and has been reducing the stake in the past three quarters as the price increased. Buffett at the end of the third quarter owned a total of 61,264,601 shares of USB, of 3.26% of shares outstanding.



Capital ratios

Tier 1 capital ratio: 10.9%

Tier 1 common equity to risk-weighted assets ratio: 9%

Total risk-based capital ratio: 13.3%

Total average deposits: $239.3 billion, compared to $215.4 billion in the third quarter of 2011

Total nonperforming assets: $2.19 billion, compared to $3.04 billion

USB’s annual revenue has declined at a rate of 0.6% over the past five years, and EBITDA declined at a rate of 10.5%. Its free cash flow grew at a rate of 16.8%, and book value grew at a rate of 8.3% over the same period. It also paid a $0.195 per share dividend in the third quarter of 2012, which increased from $0.125 in the third quarter of 2012.

Other Investments

In addition to common shares of these banks, Buffett owns $5 billion of preferred shares of Bank of America (BAC) and $5 billion in warrants to buy Goldman Sachs (GS), which he has not exercised yet.

See Warren Buffett’s portfolio here. Also check out the Undervalued Stocks, Top Growth Companies and High Yield stocks of Warren Buffett.



Rating: 3.1/5 (12 votes)

Comments

jonmonsea
Jonmonsea premium member - 1 year ago
Hi,

I see in the chart USB looks to have been decreased by 8 mil shares over past few quarters. I also notice that decrease has not be reported by GuruFocus in the portfolio of Buffett. Which is correct? The charts or the list of Sells, Adds, Buys, etc?
Invest E Gator
Invest E Gator - 1 year ago
Banks. Such a difficult decision. Buffett is all for them, and that is a pretty serious guarantee he is giving right there, but I have been through more than a few and I still have a hard time accepting them. Interest rates keep going down down down, both their interest income and their interest expense in tandem, what happens when interest rates go up?? Their loan portfolio interest incomes will go up (sans royal default rumble?) along with interest expense?

Or we are just going to get away with printing money like this forever and ever?

Its obvious he is putting his money where his mouth is with the purchases he has been making, but I cant make rhyme or reason out of it. It just doesnt make any sense that the banks are going to be A-OK with the aftermath from this. However, he has a good handful of decades in banks, and his opinion on this matter certainly takes precedence over some random internet guy thinking out loud into this comment section.

The best impression that I got from Wells Fargo and Bank of America was that they are both heavy into mortgages, very low interest rate mortgages at that, and they own a claim on the underlying real estate, I suppose thats a better asset to have than, for example, debt thats not backed by anything at all. Either way, looking at banks, I really didnt find anything of that high of a value compared to earnings anyway, not enough to make me comfortable with the risks, but maybe I am seeing a rockier road ahead for them than what they are going to have. Who knows.

Thanks for the article Holly.
ranjitsudan
Ranjitsudan - 1 year ago
I think he is buying WFC because he think interest rates will rise over next 2-3 yrs, that should increase NIM, hence underlying earnings. WFC has huge potential of loan increase without taking excess leverage with 200 billion of excess deposits. Keeping these scenarios in mind, you could have huge increase in revenues with minimal increase in expenses (operating leverage), which will increase earning exponentially.

If these scenarios unfolds over 2-3 yrs, WFC is $60-65 stock.
sjzhao2003
Sjzhao2003 - 1 year ago
I find it puzzling that most people don't recognize the powerful money machine that WFC is, fueled by lowest cost deposit and incredible scale, neither of which is likely to change any time soon. Of the three banks listed here, WFC clearly offers the most attractive return due to its prudent loan underwriting and consistent and aggressive growth in book value per share.

Right now, net interest margin (NIM) is around 3.6%, still industry leading, but a far cry from its historical average of 4.8% (1998-2012), thanks to the unprecedented monetary easing policy by the fed. If and when the yield curve steepens and WFC returns to 4.8% NIM, that alone will add $.75 to EPS even if WFC stops growing. But they will continue to grow, and their efficiency ratio will improve to the low-50's from current high 50's. So WFC's normalized earning power is around $5 (nearly 50% higher than its current $3.36) for its current size. If they achieve just modest growth in book value, the shares could be easily worth 3-4 times in a few years.

Of course, the questions is when that'll happen. I have no idea, but I'm convinced they will be growing in the meanwhile. As Buffett observed in the context of buying KO, the important thing is to figure out what will happen, and as long as you know what will happen, you don't need to worry too much about when.

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