There are quite a few bank shares in Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) portfolio, and most were selected by Warren Buffett himself. At the end of the first quarter, Berkshire owned shares in 10 different banks, and these positions have a current market value of more than $ 91 billion.
However, we have just learned that Buffett and his team have added even more to the company's largest bank equity investment, Bank of America (NYSE: BAC) . In fact, Berkshire's recent share purchase of Bank of America pushes its stake past the 1
Berkshire's recent acquisition of Bank of America and why it is so important
In a recent SEC filing, Bank of America revealed that Berkshire Hathaway owns 950 million shares in the bank. This is significantly higher than the approximately 896.2 million shares it owned at the end of the first quarter.
At today's share price, the additional 53.8 million shares bought by Berkshire translated into a further $ 1.64 billion invested in what was already the company's largest bank equity investment. Berkshire's Bank of America ownership is now worth around $ 29 billion, still well behind the tech giant Apple Berkshire's largest investment with a market capitalization of $ 51.7 billion but a firm second place ahead Coca-Cola a $ 21.2 billion investment.
Here is why this is so important. Thanks to a combination of the increased Berkshire investment and Bank of America's aggressive stock buyback, Berkshire Hathaway now owns 10.4% of the bank's outstanding shares.
The 10% ownership level is significant, especially in the case of banks. In the past, Buffett has actively avoided owning more than 10% of most of its bank shares – even selling significant amounts of Wells Fargo to remain below that threshold. Without going too deep into the implications of owning more than 10% of a bank, the point is that Buffett's willingness to deal with extra regulatory headaches to own a larger piece of Bank of America shows extreme confidence in the stock.
Why can Buffett be so confident in Bank of America?
A look at the Bank of America's recent results shows why Buffett may be particularly eager to invest. First, Bank of America does a better job of growing than the rest of the big banks.
Bank of America's loan portfolio and deposit base grew by 4% and 6% respectively in the second quarter on a year-over-year basis. The second highest loan growth among the "big four" US banks was only 2%.
Furthermore, Bank of America has done a fantastic job of improving efficiency and continues to increase profitability. The bank's 11.6% return on equity (ROE) and 1.23% return on assets (ROA) would seem ridiculous just a few years ago.
Bank of America looks from a value investor's point of view as a bargain. Bank of America has only 1.15 times book value and earnings of 12.8 times 12 months, and it continues to improve, but the improvements have not been reflected in the share price.
Buffett buys other bank shares,
To be clear, the only reason we know about Berkshire's recent investment in Bank of America is because it caused the 10% ownership limit to be exceeded. In recent quarters, Berkshire has added several of its bank shares, including JPMorgan Chase and Goldman Sachs just to name a few.
Since Berkshire is not even close to a 10% stake with these and several other bank investments, when Berkshire's next filing of 13-F is available in mid-August, it is quite possible that we will discover that Bank of America is not the only bank stock that Warren Buffett bought recently.