Warren Buffett the legendary investor from Omaha Nebraska known to the investing community as the "Oracle of Omaha" for his ability to predict the future. Buffett has always been heavily invested in financial stocks since the future of money is easier to be guessed than the future of computer software. Buffett currently owns 39.3% of his portfolio in financial stocks and his company runs one of the largest insurance divisions in the world. Buffett owns 320 million shares or 6% of the outstanding stock in Wells Fargo the fourth largest financial institution in the United States.
Despite having such a large weighting towards financials Buffett is very particular about which banks he will invest in. This is likely why the the bank Buffet is heavily invested in, Wells Fargo is down very little in the last 2 years while many other banks such as Bank of America and Citigroup have lost over 70% of their value. In fact earlier this year Wells Fargo was more valuable than it had been two years before. This shows the quality that Buffett looks for in a financial institution. In order to find a Buffett like bank lets examine some of the reasons why he bought Wells Fargo in 1990.
"With Wells Fargo, we think we have obtained the best managers in the business, Carl Reichardt and Paul Hazen... Our purchases of Wells Fargo in 1990 were helped by a chaotic market in bank stocks... Wells Fargo is big - it has $56 billion in assets - and has been earning more than 20% on equity (ROE) and 1.25% on assets (ROA)."
The first priority of Warren Buffett is to choose a bank with the best managers and best culture. The next factor he looks for is its ROA and ROE. Wells Fargo has consistently earned more than 1.5% on assets and 20% over the last 20 years. PNC Financial would also be a Buffett like investment since it has consistently had an ROA above 1.5% and ROE above 20% over the last ten years. Buffett also looks for safety and just like Wells Fargo, PNC is down very little since the beginning of the financial crisis.
The second thing Buffett looks for is the amount of risk a bank has. He has stated "Because leverage of 20:1 magnifies the effects of managerial strengths and weaknesses, we have no interest in purchasing shares of a poorly-managed bank at a "cheap" price. Instead, our only interest is in buying into well-managed banks at fair prices."
Buffett mentions that because of the substantial leverage some banks use he would not be interested in investing in a bank even if was at a fair price because leverage could be to high. This can be seen in Deutsche Bank which has leverage of almost 65 to 1. The leverage is so high it has recently asked shareholders to undertake a capital raising initiative. Even with this capital offering Deutsche Bank will still use more leverage than the average bank. When this amount of leverage is used a mistake by management will be magnified. Most of the European Banks have substantially more leverage than that of the U.S. meaning Buffett would likely not be interested in them despite their low prices.
Most of the American banks use substantially less leverage today than the 20 to 1 mentioned by Buffett that the banks typically used in 1990. Currently, PNC has leverage of 11 to 1 and Wells Fargo leverage is 13 to 1. This means these banks are extremely safe and well capitalized. These are two investments Warren Buffett would make if he were to invest in a bank today.
No comments:
Post a Comment