Weekend Economists Volvemos a Puerto Rico May 22-25, 2015

[Demeter]

51. Warren Buffett Just Bought More Of These Two Bank Stocks.

http://www.fool.com/investing/general/2015/05/23/warren-buffett-just-bought-more-of-these-two-bank.aspx

Berkshire Hathaway recently announced the current state of its stock portfolio in a regulatory filing, and it showed that the company added significantly to its holdings of Wells Fargoand US Bancorp. Why does Warren Buffett love these banks so much, and is now a good time to buy?

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Why Wells Fargo and US Bancorp?

During the first quarter, Berkshire increased its stake in Wells Fargo by about 2% to 470.3 million shares, which represents a 9.2% stake in the banking giant. And, the US Bancorp stake grew by 5% to 83.8 million shares, roughly a 4.6% stake. So, why did Berkshire buy shares of these banks, and not say, Citigroup, which many people consider to be "cheap"?

Let's start with Wells Fargo. Buffett first invested in the bank all the way back in 1989 and has consistently added to his holdings over the years. In Berkshire's 1989 letter to shareholders, Buffett wrote, "we look for first-class businesses accompanied by first-class managements," and more recently, Buffett has referred to Wells Fargo as his favorite bank. In fact, Wells Fargo became Berkshire's largest stock investment in 2012. In short, Buffett loves Wells Fargo's culture and management, as well as its focus on consumer banking. Throughout its history, the bank has maintained stronger capital levels and larger reserves than most of its peers, which is apparent when you look at how the bank performs during the tough times. In fact, during the financial crisis in 2008 and 2009, Wells was better capitalized than its peers, and had fewer risky assets on its balance sheet – allowing the bank to quickly overcome any crisis-related problems and even take advantage of the situation in several ways (such as acquiring Wachovia cheaply). He also likes Wells Fargo as a great play on the housing recovery. After all, the nation's largest mortgage lender certainly stands to benefit as the housing market improves, right? Plus, with interest rates expected to begin rising later this year, Wells Fargo could also see profits rise as mortgage rates increase and spreads potentially widen. Buffett has even gone so far as to say Wells should continue to expand its mortgage business even further than it already has, calling the mortgage business a "sensational" opportunity for the bank.

US Bancorp has a lot of the same things going for it, with a history of high-quality assets and strong capitalization, as well as a culture of risk management and responsible lending. Plus, US Bancorp is consistently among the most efficient and profitable banks in the market, with ROA, ROE, efficiency ratios, and profit margins that are among the best in the industry. Furthermore, US Bancorp is growing at a rather impressive pace, with year-over-year deposit growth of 8.1% and loan growth of 5.1%, while experiencing an 18.2% decline in net charge-offs. Finally, when it comes to US Bancorp (and Wells Fargo for that matter), the numbers speak for themselves. Just look at how the banks compare with peers in terms of profitability, efficiency, and asset quality.

GRAPH AT LINK

I JUST THINK THE FIX IS IN...BOTH BANKS ARE SLEAZY, BUT THEY DON'T END UP PAYING THE FINES, EITHER....