Warren Buffett has been a fan of owning bank stocks for several decades, even bailing them out during the financial crisis in 2008.
The CEO of Berkshire Hathaway (BRK.A) has avoided investing in regional banks and sticks to large banks with trillions in assets.
DON'T MISS: Charlie Munger Warns of 'Bad' Commercial Real Estate Loans at Banks
The banking system in the U.S. has faced turbulence recently with the closures and bailouts of Silicon Valley Bank in California and Signature Bank in New York.
First Republic Bank in California was acquired on Monday in a last minute bailout by JPMorgan Chase (JPM) after a loss of confidence from investors and customers.
Berkshire's Decade Long Investment in Banks
Buffett and his conglomerate have long been fans of bank stocks and supported them during previous financial problems, including investing $5 billion into Goldman Sachs (GS) during the financial crisis. In 2011, Berkshire made a $5 billion bet into Bank of America (BAC).
While Buffett and Charlie Munger have invested in banks for several decades, the company has stuck with large banks like Wells Fargo (WFC) and avoided investing in smaller ones.
Buffett likes banks because at "their core banking is a pretty simple business model," Robert Johnson, a professor at the Heider College of Business at Creighton University, told TheStreet.
"You pay x% for deposits and lend at y%," he said. "Banks are essential businesses and, if they stick to the fundamental business of lending money, are profitable businesses in the long-term."
Known for being a value investor, Buffett is attracted to banks on a valuation basis, Johnson said.
"They historically are valued at lower price-to-earnings ratios than the overall market, yet are able to deliver attractive rates of return on capital," he said.
Will Buffett Sell His Bank Stocks?
Buffett is not likely to divest any of his current bank holdings, Johnson said.
"I would be surprised to see Berkshire Hathaway lower bank holdings in light of recent events," he said. "Buffett has famously said 'be greedy when others are fearful and fearful when others are greedy.'”
Berkshire currently owns 1 billion shares of Bank of America and has diversified his current portfolio.
Whether Buffett believes that Bank of America is a good bet remains unknown. He could buy more shares since the industry's valuation has been impacted recently. Shares of the bank have fallen by 19.13% during the past six months, falling victim to the contagion caused by the recent bank collapses.
Tech behemoth Apple (AAPL) has become a large player in his holdings and now represents 44% of the Berkshire Hathaway marketable securities portfolio.
"The percentage of financial stocks in the Berkshire marketable securities portfolio has declined over time," Johnson said. "That is attributable to the Apple position. Apple is such an extraordinary business that Buffett and his lieutenants have such high conviction in the investment."
But Buffett has not been afraid to shed some of his bank holdings. He has sold shares of JPMorgan Chase, Goldman Sachs Group and Wells Fargo in the past and also lowered his stake in Bank of New York Mellon (BK) and U.S. Bancorp (USB) in 2022.
Buffett has stuck to his investment strategy for many decades and will not "unload his banking stocks," Anthony Chan, former economist for J.P. Morgan Chase, told TheStreet.
"If the price is right, I would never write off Warren Buffett, who has a reputation for rescuing struggling financial institutions," he said. "In 2008, he boldly invested $5 billion and reaped a staggering return of $3.1 billion!"
Buffett's First Bank Purchase
While investors are familiar with Berkshire owning stakes in large public banks, Buffett and Charlie
Munger, vice chairman of the conglomerate, bought a bank 54 years ago.
His first bank purchase was Illinois National Bank and Trust Co. in 1969.
He never bought an entire bank again, but made an investment into American Express (AXP) in 1962.
Buffett is currently the company's largest shareholder and owns 20% of its shares, according to FactSet data. His stake was valued at $22 billion at the end of 2022. Berkshire paid $1.3 billion for its stake in the financial services company and receives $302 million in annual dividends from American Express, Buffett discussed in his annual letter in February.
Between 2020 and 2021, the billionaire sold his stake in Wells Fargo (WFC). Berkshire had owned 346 million shares at the end of 2019.
Commercial Property Loans Are 'Bad,' Munger Says
The commercial property loans held by U.S .banks are problematic since many of them would be deemed as "bad loans" since property values have declined, said Munger.
Banks in the U.S. are “full of” real estate loans that he considers "bad loans," he told the Financial Times.
“Berkshire has made some bank investments that worked out very well for us,” Munger said. “We’ve had some disappointment in banks, too. It’s not that damned easy to run a bank intelligently, there are a lot of temptations to do the wrong thing.”
While Berkshire has been a longtime investor in insurance companies, neither Munger nor Buffett like the volatility that stems from loans in commercial real estate. The decline in property values may not see a turnaround soon, especially in office buildings as well as shopping centers as portions of the workforce continue to work remotely.
“A lot of real estate isn’t so good any more,” he said. “We have a lot of troubled office buildings, a lot of troubled shopping centers, a lot of troubled other properties. There’s a lot of agony out there.”
Some banks had already started lowering their risk by approving fewer commercial real estate loans that developers sought.
“Every bank in the country is way tighter on real estate loans today than they were six months ago,” Munger said. “They all seem [to be] too much trouble.”
Berkshire's Returns Beat S&P 500
Since 1965, Berkshire produced compounded annual returns of almost 20%,which is twice the rate generated by the S&P 500.
Munger credits part of their success to their timing and some good luck.
“We were a creature of a particular time and a perfect set of opportunities,” he said Munger.
The two investors also had several advantages, including “by and large [from] low interest rates, low equity values, ample opportunities,” he said.
Munger's net worth is valued at $2.4 billion by Forbes and is diversified. In addition to his shares in Berkshire, he has invested in warehouse retailer Costco (COST), plus Munger allocated money into a fund managed by Li Lu’s Himalaya Capital. He also invested money into Afton Properties, a real estate company venture that owns apartments in New Jersey and California.
His wealth is the result of investing in companies at a discount.
“It’s the nature of things that a very intelligent man working hard maybe gets three, four, five really good long-term opportunities of buying great companies at a cheap price,” Munger said. “It happens rarely.”
Investors are eagerly awaiting Berkshire's annual meeting in Omaha on May 6 when Munger and Buffett will discuss their investment strategies and take questions from their shareholders.
