The banking crisis that broke out in March, which has led to the collapse of four U.S. banks and Credit Suisse, has led to a sell-off of bank stocks across the sector.
The SPDR S&P Regional Banking ETF (KRE +2.24%) is down close to 31% this year, while the KBW Nasdaq Bank index, which covers larger banks, is down more than 23%. Many investors are worried the sector may not have seen deposit flows stabilize yet and also faces the normalization of credit, which will lead to higher loan losses and stricter regulatory requirements as well, all of which will weigh on earnings and overall returns.
But despite the concerns, Warren Buffett's company Berkshire Hathaway (BRK.A 0.16%)(BRK.B 0.11%) stuck with two of its large bank holdings and slightly increased its position in these holdings during the first quarter. Let's take a look.
1. Bank of America
Bank of America (BAC +0.78%), the second-largest bank by assets in the U.S., has seen its stock price decline more than any of its large-bank peers. Berkshire has built Bank of America into the second-largest position in its portfolio while adding to the bank as it sold many other bank stocks during the beginning of the pandemic, so it's pretty clear that Buffett and Berkshire have extreme confidence in the bank.
Investors have grown more cautious about Bank of America since the crisis started because the bank has significant unrealized bond losses on its balance sheet. Rising interest rates have crushed bond values, and Bank of America invested a lot of its excess liquidity into bonds when interest rates were low.
NYSE: BAC
Key Data Points
Still, the likelihood of Bank of America ever needing to sell those securities while they trade at a loss remains extremely slim because Bank of America has one of the most well-diversified deposit bases in the world. This includes more than $1 trillion of consumer and small business deposits, nearly $500 billion of deposits in global banking, and roughly $300 billion in global wealth and investment management. These deposits are held by consumers, businesses, corporations, and other entities of all different sizes and all over the world.
While the bank could have managed its balance sheet better by holding cash during the early years of the pandemic, its strong and resilient deposit base should allow it to grind down the unrealized losses over time, which should get investors more comfortable again with the stock.
2. Citigroup
Berkshire only started buying Citigroup (C +2.20%) last year, and it's a much smaller position than Bank of America. While Citigroup has struggled for several years, I don't think the banking crisis had too much of an impact on the bank and may end up benefiting the bank when everything is said and done.
Citigroup is currently in the midst of a strategic transformation in which it is divesting its international consumer banking operations in an effort to become simpler and focus on higher-performing businesses. This strategy will hopefully lower Citigroup's regulatory capital requirements as well.
The bank recently encountered a small hitch in its plan when it announced that it would no longer pursue a sale of its Mexican consumer franchise, Citibanamex, which currently consumes a lot of capital. Instead, the bank plans to spin off the business into an initial public offering sometime in 2025. This is not a thesis-breaking event, but the transformation will take longer and require more patience.
NYSE: C
Key Data Points
Buffett and Berkshire clearly seem to like CEO Jane Fraser's strategy, and with the bank trading at just slightly over half of its tangible book value, or net worth, it seems like there is a lot of downside protection priced in. The big near-term question is when the bank can begin repurchasing significant levels of its own stock, which would be beneficial with the stock trading at such depressed levels, but I'd agree with Buffett that there is a big opportunity here for patient investors.
