American banks, the epicentre of the financial crisis, are completely healed, says America’s most famous investor, Warren Buffett. In a recent interview he told Bloomberg: “The banks will not get this country in trouble, I guarantee it…. our banking system is in the best shape in recent memory.”
Buffett’s record as an investor may be legendary, but his views are at odds with many other investors who are still wary of battered banks. Despite a rally in 2012, major US banks such as Citigroup, Bank of America, Goldman Sachs and JPMorgan all trade at less than their book values.
Yet in the interview, Buffett rejects criticisms that the US banking system remains inherently unstable: “We do not have an unusually concentrated banking system compared to the rest of the world, and there are certain advantages in the largest capital market in the world to having banks that are somewhat consistent with the size of those markets.”
Buffett has been positive on the sector for a while. Five years ago, at the height of the financial crisis, it looked like America’s entire banking system could collapse. Lehman Brothers and Bear Stearns had both gone bust, and the share prices of their remaining rivals tanked as pundits tried to predict who would be the next to fall. But just as the crisis hit peak ferocity Buffett took an almighty punt on financials and shored up an ailing Goldman Sachs by buying $5bn-worth of preferred shares.
Since then he has kept faith in the sector, frequently buying bank shares when the price dips. Indeed, his firm, Berkshire Hathaway, now has major investments in four of the seven biggest US banks. For example, he has a $14bn stake in Wells Fargo & Co, and $5bn in Bank of America. In 2011 he was forced to hand back his Goldman shares (Goldman exercised its right to buy them back) having made a return of $1.8bn on the deal. But he still holds warrants that allow him to buy another $5bn-worth of shares at rock-bottom prices.
So should you follow Buffett’s bullish lead and buy US banks? On the one hand, given the amount of money Buffett has put into the sector, investors can assume his comments are credible. On the other, it means he also has a serious vested interest in talking the sector up.
However Buffett isn’t the only contrarian to like US banks. MoneyWeek’s own banking expert, James Ferguson, highlighted his favourite banking stocks in a recent roundtable discussion. (If you’re not already a subscriber, subscribe to MoneyWeek magazine.)