By Philip van Doorn
This is the time of the quarter when investors get to see what changes Warren Buffett and the management team at Berkshire Hathaway have made to the conglomerate’s stock portfolio.
The big splash in Berkshire Hathaway Inc.’s /zigman2/quotes/200060694/composite BRK.B -0.65% 13F filing with the Securities and Exchange Commission for the end of the first quarter is that Buffett decided he had held shares of Wells Fargo & Co. /zigman2/quotes/203790192/composite WFC +0.45% long enough and that it was time to begin buying Citigroup Inc. /zigman2/quotes/207741460/composite C -0.55% .
So this is a ripe moment to look at all the bank stocks held within Berkshire’s stock portfolio. Investment managers of a certain size must publish their holdings of publicly traded stocks as of the last day of the quarter within 45 days. The deadline was Monday.
First, here are Berkshire’s bank stocks as of March 31, sorted by the market value of Berkshire’s stakes, in dollars:
|Bank||Ticker||Value of Berkshire’s holdings – March 31||Company market cap – March 31||Berkshire ownership %|
|Bank of America Corp .||BAC||$41,636,346,979||$332,637,209,586||12.52%|
|American Express Co.||/zigman2/quotes/203805826/composite AXP||$28,351,200,900||$141,613,024,300||20.02%|
|U.S. Bancorp||/zigman2/quotes/206934678/composite USB||$6,719,110,694||$78,980,900,000||8.51%|
|Bank of New York Mellon Corp.||/zigman2/quotes/200171276/composite BK||$3,591,100,392||$40,056,683,684||8.97%|
|Citigroup Inc.||/zigman2/quotes/207741460/composite C||$2,945,319,560||$103,698,554,700||2.84%|
|Ally Financial Inc.||/zigman2/quotes/206227672/composite ALLY||$389,990,382||$14,231,264,880||2.74%|
|Sources: Berkshire Hathaway’s 13F filing for March 31, 2022, FactSet.|
Berkshire Hathaway is the top shareholder of Bank of America Corp. /zigman2/quotes/200894270/composite BAC -1.01% , American Express Co. /zigman2/quotes/203805826/composite AXP -0.53% , U.S. Bancorp /zigman2/quotes/206934678/composite USB -0.28% and Bank of New York Mellon Corp. /zigman2/quotes/200171276/composite BK -0.80% .
Here are valuations, dividend yields and returns on average tangible common equity (ROE) and average assets (ROA) for the group’s most recently reported quarters. Wells Fargo was added to the bottom of the list of banks, as Berkshire unloaded the entire stake, followed by aggregate numbers calculated by FactSet for the S&P 500 banking sector:
|Bank or Group||Ticker||Price/ tangible book||Forward P/E||Dividend yield||ROE||ROA|
|Bank of America Corp.||/zigman2/quotes/200894270/composite BAC||1.67||10.2||2.41%||17.87%||1.00%|
|American Express Co.||/zigman2/quotes/203805826/composite AXP||6.43||16.2||1.33%||44.50%||4.04%|
|U.S. Bancorp||/zigman2/quotes/206934678/composite USB||2.15||10.8||3.81%||21.14%||1.26%|
|Bank of New York Mellon Corp.||/zigman2/quotes/200171276/composite BK||2.42||9.2||3.15%||19.76%||0.77%|
|Citigroup Inc.||/zigman2/quotes/207741460/composite C||0.60||7.5||4.30%||11.83%||0.77%|
|Ally Financial Inc.||/zigman2/quotes/206227672/composite ALLY||1.04||5.3||3.10%||22.13%||1.60%|
|Wells Fargo & Co.||/zigman2/quotes/203790192/composite WFC||1.20||9.7||2.37%||15.23%||1.06%|
|S&P 500 Banks||1.60||9.6||3.10%||12.05%||1.08%|
ROE and ROA don’t always make for uniform comparisons. American Express has the highest for both measures on this list because its core revenues are fee income from transaction processing and card memberships, rather than interest income on loans.
Bank of New York Mellon’s ROE is high, while its ROA is low, because it also focuses on fee income — from securities custody and asset management services.
Ally Financial Inc. /zigman2/quotes/206227672/composite ALLY +1.02% has the second-highest ROE and ROA, reflecting its focus on auto lending.
Citigroup is by far the cheapest bank stock held by Berkshire on a price-to-book-value basis. Many investors distrust the company for two reasons: It has been reorganizing itself for decades, following a series of large acquisitions that ended in 2001. And the extraordinary government bailout of the bank during the 2008-2009 credit crisis diluted its common equity so much that the stock was down 89% for 15 years through May 13, 2022, with dividends reinvested.
Buffett seems to have faith in Citigroup. So does Odeon Capital Group analyst Dick Bove, who rates Citi a “buy” with a target price of $57.35, which would be a 21% gain from the stock’s closing price of $47.46 on May 16. This is because Citi is now “one of the strongest companies in the nation,” Bove wrote in a note to clients on May 7.
Citi’s “cash equals $272 billion or 2.7x its market capitalization and 1.5x its commonequity,” Bove wrote.
Based on the updated market cap for Citi on the first table, above, its cash is now worth 2.6 times its common equity. Bove added that with loans making up only 28% of assets and 50% of deposits, and with most of its securities investments having “some type of government guarantee,” it was “not unfair to argue that this is a fortress balance sheet.”
So Bove’s thesis for Citi isn’t that it will be such a strong performer over the short term, especially if the U.S. is heading into a recession, as Bove expects. This is a long-term play for him, and probably for Berkshire Hathaway as well.
“[I]nvestors are completely misreading this company’s risk. It is cash- and securities-rich. The stock simply does not reflect this,” Bove wrote.
Here’s a summary of opinion of the six banks held by Berkshire at the end of the first quarter, plus Wells Fargo, among analysts polled by FactSet:
|Bank||Ticker||Share “buy” ratings||Closing price – May 16||Consensus price target||Implied 12-month upside potential|
|Bank of America Corp.||BAC||64%||$34.81||$48.78||40%|
|American Express Co.||/zigman2/quotes/203805826/composite AXP||48%||$156.43||$196.95||26%|
|U.S. Bancorp||/zigman2/quotes/206934678/composite USB||35%||$48.27||$60.60||26%|
|Bank of New York Mellon Corp.||/zigman2/quotes/200171276/composite BK||47%||$43.24||$54.50||26%|
|Citigroup Inc.||/zigman2/quotes/207741460/composite C||56%||$47.46||$65.18||37%|
|Ally Financial Inc.||/zigman2/quotes/206227672/composite ALLY||81%||$38.73||$58.60||51%|
|Wells Fargo & Co.||/zigman2/quotes/203790192/composite WFC||83%||$42.21||$59.86||42%|
Ally Financial is the favorite of these seven bank stocks among analysts working for brokerage firms.