Bank stocks have a high ROE, and most of the US listed banks that are well-managed are favored by Buffett and continue to be heavily stocked. At the end of 2019, Berkshire Hathaway had 6 banks in the top 15 heavyweight stocks, and 2 credit card companies. It can be said that bank stocks accounted for half of Buffett’s heavyweight stocks.
As of the end of 2019, Buffett’s Berkshire Hathaway held six of the top fifteen heavyweight stocks (ranked by market capitalization), in this order: Bank of America, Wells Fargo, United Bank, Morgan Chase, Maylong Bank of New York, Goldman Sachs. In addition, American Express and Visa in the top 15 positions are credit card companies.
In the first quarter of 2020, affected by the new crown epidemic, the U.S. economic recession was obvious, and the stock price of bank stocks fell significantly. Buffett’s Berkshire Hathaway bank shares (including American Express and VISA, two credit card companies) held a market value of 37.78 billion US dollars in the first quarter. However, Berkshire Hathaway did not significantly reduce its bank shares in the first quarter, but only significantly reduced its position in Goldman Sachs and slightly reduced its holding in JP Morgan Chase Bank. In 2020, the number of shares held by other banks did not change in the first quarter. Tianfeng Securities believes that there is no need to over-interpret Berkshire Hathaway’s slight lightening of individual bank stocks in the first quarter.
Reasons for preference for bank stocks
Buffett has repeatedly publicly expressed his love for bank stocks. Buffett said he feels good about the banks he owns and is very attractive compared to most other securities. “Banking is a good industry, if you don’t do stupid things in terms of assets.”
Buffett said in a letter to shareholders in 1990, “Since the 20-fold leverage of the banking industry will greatly amplify the advantages and disadvantages of business management, we have no intention to buy low-management bank stocks at a cheap price; instead, we only care about reasonable The price buys well-managed bank stocks.”
Buffett believes that most of the bank stocks he holds are repurchased every year, so he will also increase the proportion of holdings without spending a penny. Buffett wrote in a 2016 letter to shareholders, “A number of companies that Berkshire Hathaway, including Bank of America, have invested in have been repurchasing shares. Many companies have repurchased shares. Quite amazing. We really like stock repurchases because we believe that in most cases, the stocks repurchased by the company are undervalued in the market. After all, the reason we hold these stocks is also because we believe that these stocks are undervalued . When a company’s scale of operations continues to expand, but the number of company’s outstanding shares continues to decline, shareholders will benefit greatly.”
Investment bank stocks also have drawbacks. Buffett explained in a letter to shareholders in 1990: “The banking industry is not our favorite. This industry is characterized by assets that are about 20 times the equity, which means that as long as there is a problem with the assets, it is possible to lose shareholder equity. . And the problems of big banks have long been the norm rather than the exception. Many of the problems are due to the negligence of managers, like the ‘institutional coercive force we mentioned in 1989-that is, the executive directors’ meeting. Involuntarily imitate the practices of other peers, no matter how stupid these behaviors. When engaging in lending business, many bankers also have the tendency of lemmings to follow the leader, so now they must also bear the same fate as lemmings .”
Wells Fargo Bank’s Thirty Years’ Recovery
Thirty years is the length of time that Buffett has held shares in Wells Fargo. As a model for value investors, Buffett’s shareholding cycle is very long. Buffett bought Wells Fargo as early as 1989, and held 9.7% at the end of 1990. At that time, the shareholding ratio did not exceed 10%, mainly because holding more than 10% of individual bank shares that year required the approval of the Federal Reserve. Over the past 30 years, Buffett’s holdings in Wells Fargo have increased or decreased, but it has consistently ranked among Buffett’s four largest positions. As of the end of 2019, Buffett’s shareholding in Wells Fargo was 8.4%.
However, in the 30-year time dimension, Wells Fargo itself has undergone many changes, from retail benchmarking to going down the altar. It can be said that Wells Fargo’s performance has been poor in the past 10 years. After the “fake account” incident in 2016, Buffett has also reduced its holdings in Wells Fargo Bank stocks in recent years.
Wells Fargo was born out of a courier company. In 1996, it acquired the first intercontinental bank of considerable size. However, until 1998 before the acquisition of Northwest Bank, Wells Fargo Bank, which had experienced more than a hundred years of ups and downs, was only a regional bank. During the financial crisis in 2008, the Bank of America was merged and acquired, becoming one of the four major banks in the United States. Rich countries rely on the advantages of community banks and cross-selling to form a business and income structure that is different from those of the other three major banks.
In July 2013, Wells Fargo’s market value surpassed that of Industrial and Commercial Bank of China and once became the world’s most valuable bank. Unfortunately, it did not stay on the throne of the world’s largest bank by market value. Wells Fargo is well-known to domestic investors, one is Buffett’s 30-year holding of it, one is positioning its community-based bank for Wells Fargo, and has long focused on the retail business.
The performance has increased 27 times in 30 years, but the growth has slowed down significantly in the past 10 years. Wells Fargo’s 1990 revenue and net profit were only US$3.22 billion and US$711 million, respectively. In 2019, revenue and net profit were as high as US$85.06 billion and US$19.55 billion, which were 26.4 times and 27.5 times 1990. From 1990 to 2019, large and medium-sized banks such as First Intercontinental Bank (1996), Northwest Bank (1998), and Midland Bank (2008) were successively acquired, and the revenue of Wells Fargo increased significantly.
Since Mergers and Acquisitions of Bank of America in 2008, Wells Fargo has conducted business integration. But so far, the scale of revenue has not increased compared with 2009, and net profit has increased. The revenue growth rate in 2019 was -1.6% year-on-year, and the net profit growth rate was -12.7% year-on-year.
Although Wells Fargo is known as the leader in retail banking, its retail business revenue and net profit share have continued to decline over the past decade. For more than ten years, the advantages of Wells Fargo’s community banking have not been strengthened, and the interest margin and ROE leading edge have continued to weaken and become ordinary.
The contribution of the community banking sector declined. Over the past 15 years, Wells Fargo’s community bank revenue and net profit have both declined significantly. In 2006, community bank net profit accounted for 66.1%, and in 2019 it dropped to 37.8%. Behind the decline in the contribution of community banks is the significant decline in the share of personal loans. Since 2008, the scale of Wells Fargo’s loans has grown almost zero, but the proportion of personal loans has fallen by more than 10 percentage points.
Wells Fargo’s advantage in spreads has weakened. Due to changes in the credit structure over the past decade or so, community banking business has developed generally, the contribution of the retail sector has declined, and the net interest margin of Wells Fargo has also experienced a significant decline. In 1999, Wells Fargo’s net interest margin due to retail advantages and other measures reached 5.35%. In 2019, the net interest margin was only 2.73%, a large decline. Twenty years ago, the net interest margin of Wells Fargo was significantly higher than that of JP Morgan Chase Bank and Citigroup. In recent years, the net interest margin has been close, and the advantage is no longer there.
Various indicators of Wells Fargo are more common. As of the end of 2019, Wells Fargo’s assets amounted to US$1.93 trillion, of which, loans were US$9623 billion; deposits were US$1.32 trillion, and the loan-to-deposit ratio was 73%. In 2019, revenue was US$85.06 billion, pre-provision profit was US$26.885 billion, net profit was US$19.549 billion, ROA was 1.02%, ROE was 10.23%, ROTCE was 12.2%, cost-income ratio was 68.4%, and net interest margin was 2.73%. Compared with domestic banks with a cost-to-income ratio of around 25%, Wells Fargo’s cost-to-income ratio is significantly higher.
Wells Fargo’s share price once outperformed the broader market, but its performance in the past decade has been average. From 1990 to 2000, Wells Fargo’s share price rose more than 10 times. During 2009-2019, Wells Fargo’s share price returned an annualized rate of 10%, underperforming the S&P 500 and KBW Nasdaq Bank Index over the same period. During the financial crisis in 2009, its share price fell to a minimum of $6.03 per share. Affected by the new crown epidemic, the stock price dropped to about US$26 per share.
30-year investment income split: earn ROE money
In 1990, the United States was in the midst of a real estate bubble burst, bank stocks slumped, and investors abandon bank stocks. Buffett took advantage of the market panic and bought at a valuation of less than 1 PB and less than 5 times PE (TTM) Wells Fargo Bank.
Buffett is a staunch holder of Wells Fargo and bought Wells Fargo as early as 1989. Buffett held a 9.7% stake in Wells Fargo at the end of 1990, one-sixth of which was bought in 1989, and the rest increased in 1990. The shareholding ratio did not exceed 10%, mainly because at that time holding more than 10% of the shares of a single bank required the approval of the Federal Reserve. In the past 30 years, Buffett’s shareholding in Wells Fargo has increased or decreased, but it has always ranked Buffett’s BIG FOUR position. As of the end of 2019, Buffett’s accumulated income from Wells Fargo Bank’s positions in the past 30 years was approximately US$19 billion, of which, cumulative dividends were approximately US$7.5 billion.
Over the past 30 years, Wells Fargo has paid dividends on a quarterly basis, and most of the dividends have remained between 20%-50% each year. Even if the profit is very poor in individual years, it will ensure the stability of the dividend amount, which will greatly increase the dividend ratio. Judging from the dividend rate, due to changes in valuation, the dividend rate is mostly between 2% and 4%. Different from domestic listed banks, in addition to cash dividends, the US listed banks also carry out a large number of stock repurchases. In 2019, Wells Fargo’s ROE was 10.23% and ROTCE was 12.2%. Wells Fargo’s 2019 dividend (US$7.938 billion) and stock repurchase (US$22.262 billion) totaled US$30.2 billion, significantly exceeding the net profit of US$19.5 billion that year.
Long-term holdings earn ROE money. Buffett has invested in Wells Fargo for 30 years, and it is very rare for him to stick to the time. According to estimates by Tianfeng Securities, the total return of investing in Wells Fargo Bank in the past 30 years is 28.9 times, and it mainly earns ROE money. The contribution of valuation changes is very small.
From 1990 to 2003, the average ROE of Wells Fargo was 16.77%, the investment return exceeded 10 times, and the compound return rate was 18.9%. During this period, Wells Fargo’s PB valuation increased from 0.99 times to 2.9 times, the valuation increase contributed 20% of the investment return, and ROE contributed the rest; from 2004 to 2019, Wells Fargo’s average ROE was 12.56%, Buffett’s investment return 164%, during which ROE contributed 557%, and the valuation of PB was reduced from 2.9 times to 1.33 times, which had a greater impact on the investment income in the past 16 years.
The 30-year investment valuation contribution is very small. Thirty years ago, at the end of 1990, Wells Fargo’s valuation was 0.99 times PB, and 30 years later, the valuation at the end of 2019 was 1.33 times PB, with little change in valuation. Over the past 30 years, the valuation of Wells Fargo’s PB has been 3.6 times higher, but it has returned to its original point within 30 years. If you only earn ROE in these 30 years, the return on investment in the 30 years from 1990 to 2019 will be 54.6 times. According to estimates by Tianfeng Securities, Buffett’s investment in Wells Fargo has returned about 28.9 times in 30 years and has not fully earned ROE money. Because Buffett’s valuation of Wells Fargo exceeded 2 PB in 2004-2007, Buffett had a large increase in Wells Fargo, which dragged down the overall investment yield.
As of December 31, 2019, Wells Fargo’s valuation was 1.33 times PB and 10.78 times PE (TTM). In recent years, the stock price has been greatly affected by the “fake account” scandal, and the valuation of PB has declined. Over the past 30 years, Wells Fargo’s PE valuation has been 10-20 times in most years, and the average PE valuation in the past 30 years is about 20 times; PB valuation is mostly between 1-3 times, and the average value in the past 30 years is about 2 times PB valuation .
Reasonable valuation is the key. When Buffett bought Wells Fargo in 1989 and 1990, there was little concern about bank stocks. Wells Fargo’s valuation was only about 1 times PB, less than 5 times PE. When the value is overestimated, reduce holdings. From 1998 to 2001, during the period of market excitement, Buffett significantly reduced its holding of Wells Fargo. At that time, Wells Fargo’s valuation was more than 3 times PB. Between 1990 and 2003, Buffett’s return on investment in Wells Fargo exceeded 10 times.
Buffett has also increased its holdings in Wells Fargo Bank at a higher valuation, and in hindsight the return on investment is not good. In 2005, Buffett massively increased its holdings in Wells Fargo, and its shareholding ratio rose from 3.3% to 5.7%; thereafter it continued to increase slightly in 2006-2015. From the point of view of the resumption, the increase in holdings during this period and the return on investment are not high, which is not a good investment decision. Over the past 10 years, Wells Fargo’s share price has underperformed the market significantly.
Revelation of Buffett Bank Stock Investment
From Buffett’s decades of investment in bank stocks, Tianfeng Securities believes that the following points deserve attention:
Buy quality bank stocks. Buffett said in a letter to shareholders in 1990, “Since the 20-fold leverage of the banking industry will greatly amplify the advantages and disadvantages of business management, we have no intention to buy low-management bank stocks at a cheap price; instead, we only care about reasonable The price buys well-managed bank stocks.”
Long-term holdings mainly earn ROE money, so a stable and high ROE is the key. Good management not only brings a higher safety margin but also a better ROE level. Buffett has repeatedly praised the managers of the invested banks in his letter to shareholders. Many managers including Illinois National Bank CEO Aberg, Bank of America CEO Monihan and JP Morgan CEO Dimon have been highly praised by Buffett.
Buffett said: “Good cost control is a key factor for the success of the bank. Our past experience shows that companies with high costs and expenses, its operators often find new excuses to increase expenses, while companies with low costs, it Of operators can usually find ways to reduce expenditures for the company, even if the company’s costs are already much lower than their peers’ competitors.” Many managers such as Illinois National Bank, Bank of America, and JPMorgan Chase are following this business philosophy Reduce costs and expenses.
Buffett once said in a letter to shareholders that he has no interest in buying poorly managed banks at a cheap price. On the contrary, he hopes to be able to buy some well-managed banks at a reasonable price. The banks it invests in, such as the National Bank of Illinois, Wells Fargo Bank, Bank of America, and JPMorgan Chase, are commercial banks that have led the industry in different periods.
Second, buying at low valuations, the crisis often brings the opportunity to buy high-quality bank stocks at low valuations. For example, when the US real estate bubble burst in 1990, and when there was little interest in banking stocks, Buffett bought Wells Fargo at a very low valuation; invested in Goldman Sachs in the 2008 financial crisis; and invested in Bank of America in 2011.
Buffett’s dive into the Wells Fargo Bank in the real estate bubble crisis, the investment in Goldman Sachs and the Bank of America in the subprime mortgage crisis are all contrary to the investors who sold a lot in the market because of panic. These investments have brought Berkshire high returns. In addition, Buffett often improves operations by becoming a major shareholder and exerting an influence on bank operations, accelerating the release of intrinsic value.
Again, hold for a long time, earn ROE money, and be a friend of time. Buffett has invested in Wells Fargo for 30 years, and achieved an investment return of 28.9 times, mainly to earn ROE money. At the end of 1990, Wells Fargo’s valuation was 0.99 times PB, and by the end of 2019, Wells Fargo’s bank was 1.33 times PB. The contribution of valuation changes to investment income Very small. Therefore, a stable and high ROE is critical to long-term investment.
Fourth, it is not limited to common stock investment, and focuses on other investment tools. In the investment of bank stocks, Buffett often adopts the form of high-dividend preferred stocks + warrants. Preferred stocks solve the marginal safety problem and warrants solve the problem of investment income space. For example, the investment in Bank of America in 2011 was a preference share with a 6% dividend of US$5 billion, accompanied by a warrant to subscribe for US$5 billion of common stock at a certain price. It was the warrant that made Buffett make a big profit.
Economic rebound catalyzes valuation repair
In 1990, the United States was in the midst of a real estate bubble burst, bank stocks slumped, and investors all abandoned bank stocks. Buffett bought a 10% stake in Wells Fargo at a price-earnings ratio of less than 5 times when the market was frightened Substantial return on investment.
The banking industry is closely related to the real economy. A-share listed banks have a higher ROE, and long-term investment in high-quality bank stocks is expected to achieve a better return than the social average.
Currently, the A-share bank (CITIC) index is only 0.71 times PB, the lowest in history. As the economic stimulus policy comes into effect, the growth rate of social financing is expected to increase significantly, and the economy may rebound significantly in the second half of 2020. The market’s pessimistic expectations of bank stocks are expected to reverse, supporting the upward valuation of bank stocks. The unexpected quarterly report and April financial data were also catalysts.
Long-term investment mainly earns ROE money, so a stable and high ROE is the key. The market will like bank stocks with long-term retail banking or comprehensive financial logic, because these target ROEs can remain stable or may rise, so the market often gives a certain premium. Although the ROE of some stocks is high, the quality of the assets is not good. The market is worried that the ROE will decline in the future, so it will give a certain discount. Good operation is the guarantee of ROE, so the market prefers high-quality bank stocks.