uploads/2019/07/warren-buffett.jpeg

Should Warren Buffett Be Adding Banking Stocks?

By

Updated

  • Warren Buffett has increased Berkshire Hathaway’s stake in Bank of America.
  • The company’s portfolio is already overweight on banking stocks.
  • Generally, Buffett has tried to limit stakes in publicly traded companies to below 10%.

Warren Buffett

In a regulatory filing, Berkshire Hathaway (BRK-B) revealed that it had increased its stake in Bank of America (BAC). Berkshire owned 950 million BAC shares on July 17 compared to 896.2 million shares on March 31. Asset managers are required to disclose their holdings within 45 days of a quarter’s end. In this case, Berkshire’s stake in BAC exceeded 10%, so it had to report its stake earlier. Earlier this year, Berkshire’s stake in Delta Airlines also exceeded 10%.

Warren Buffett and banking stocks

Warren Buffett has always had a flair for picking banking stocks. Berkshire Hathaway holds stakes in banks such as Wells Fargo (WFC), Goldman Sachs (GS), JPMorgan Chase (JPM), Bank of America, US Bancorp (USB), and Bank of New York Mellon (BK). If we look at Berkshire’s first-quarter 13F filing, we’ll see that it sold some Wells Fargo shares. Berkshire has been gradually selling Wells Fargo shares to keep its stake in the bank below 10%. However, in the first quarter, Berkshire increased its stake in JPMorgan Chase. Buffett first took a stake in JPMorgan in the third quarter of 2018. Since then, he’s gradually been adding more of its shares to Berkshire’s portfolio.

Banking stocks’ performances

Wells Fargo, Goldman Sachs, JPMorgan Chase, Bank of America, US Bancorp, and Bank of New York Mellon have risen 6.3%, 32.8%, 21.3%, 24.4%, 25.6%, and 2.3%, respectively, year-to-date. The SPDR S&P 500 ETF (SPY) has seen upward price action of 21.1%. Among Buffett’s banking holdings, Wells Fargo and Bank of New York Mellon have underperformed SPY by a wide margin this year. Buffett himself has underperformed SPY as well. Berkshire Hathaway is up only 1.8% despite broader equity markets trading near their all-time highs.

The argument against banking stocks

We’ve seen a fall in Treasury yields so far this year. Lower long-term rates are typically negative for banks, as they borrow short term but lend long term. According to the Financial Times, “The earnings of banks that have significantly more deposits than loans are hit harder than others by falling rates.” It cited Bank of America as an example. CNBC reported, “Large-cap banks could see their earnings on a per share basis decline by 10%, on average, if the Fed lowers rates by 75 basis points, according to Bank of America Merrill Lynch.”

Economic cycle

We’re seeing an economic growth slowdown. Some observers are also pointing to an impending recession. Earlier this year, Buffett said that economic growth was slowing. In a growth slowdown, banking stocks may not provide the desired returns.

Barring Credit Suisse, other banks cleared the Fed’s stress tests and announced their capital return plans after doing so. Read Banks Reward Shareholders after Stress Test Results for more info.

More From Market Realist