Warren Buffett is an iconic figure in the investment space. Over the decades he managed to build an empire around his Berkshire Hathaway holding company. In addition to fully-owned subsidiaries, Mr. Buffett also holds $109 billion in shares of publicly-traded companies, the majority of which provided the “Oracle of Omaha” with impressive returns. Even though, Berkshire Hathaway’s equity portfolio is diversified, a significant position, 46% to be exact, is tied up in financial stocks. Among financial companies that Mr. Buffett is bullish on are several of the United States’ big banks. In a recent interview on CNBC, Mr. Buffett provided his opinion regarding big US banks and whether they work in the current environment or should be split in order to provide more value.
Mr. Buffett considers that as there are different capital requirements based on the size of a firm, a bank, even a big one, can become unprofitable. “You make decent return on equity through leverage,” the investor said. In this way, banks can earn money not only on their capital, but also on their liabilities, which are represented by deposits. In this way, if the value of capital grows relative to the bank’s liability, the returns can reach a level where they are not attractive anymore.
Out of the US’ five largest banks: JPMorgan Chase & Co. (NYSE:JPM), Goldman Sachs Group Inc (NYSE:GS), Bank of America Corp (NYSE:BAC), Citigroup Inc (NYSE:C) and Wells Fargo & Co (NYSE:WFC), Mr. Buffett owns large positions in two banks: Wells Fargo and Goldman Sachs, both holdings being included in Berkshire’s top 10 largest positions in terms of value. Moreover, for the last two years, Wells Fargo & Co (NYSE:WFC) represented Berkshire’s most valuable position. At the end of 2014, the firm held around 463.45 million shares of the bank, the value of the stake amounting to $25.41 billion, accounting for 23% of its equity portfolio. Berkshire also owns the largest stake in Wells Fargo & Co (NYSE:WFC) among institutional investors. In addition, among funds that we track, 10 billionaires held around $27 billion worth of the company’s stock. Taking into account that Buffett’s stake is worth $25 billion, in this perspective the position is even more impressive.