Warren Buffett the legendary investor from Omaha Nebraska known to the investing community as the "Oracle of Omaha" for his ability to predict the future. Buffett has always been heavily invested in financial stocks since the future of money is easier to be guessed than the future of computer software. Buffett currently owns 39.3% of his portfolio in financial stocks and his company runs one of the largest insurance divisions in the world. Buffett owns 320 million shares or 6% of the outstanding stock in
Wells Fargo the fourth largest financial institution in the United States.
Despite having such a large weighting towards financials Buffett is very particular about which banks he will invest in. This is likely why the the bank Buffet is heavily invested in, Wells Fargo is down very little in the last 2 years while many other banks such as
Bank of America and
Citigroup have lost over 70% of their value. In fact earlier this year Wells Fargo was more valuable than it had been two years before. This shows the quality that Buffett looks for in a financial institution. In order to find a Buffett like bank lets examine some of the reasons why he bought Wells Fargo in 1990.
"With Wells Fargo, we think we have obtained the best managers in the business, Carl Reichardt and Paul Hazen... Our purchases of Wells Fargo in 1990 were helped by a chaotic market in bank stocks... Wells Fargo is big - it has $56 billion in assets - and has been earning more than 20% on equity (ROE) and 1.25% on assets (ROA)."
The first priority of Warren Buffett is to choose a bank with the best managers and best culture. The next factor he looks for is its ROA and ROE. Wells Fargo has consistently earned more than 1.5% on assets and 20% over the last 20 years.
PNC Financial would also be a Buffett like investment since it has consistently had an ROA above 1.5% and ROE above 20% over the last ten years. Buffett also looks for safety and just like Wells Fargo, PNC is down very little since the beginning of the financial crisis.
The second thing Buffett looks for is the amount of risk a bank has. He has stated "Because leverage of 20:1 magnifies the effects of managerial strengths and weaknesses, we have no interest in purchasing shares of a poorly-managed bank at a "cheap" price. Instead, our only interest is in buying into well-managed banks at fair prices."
Buffett mentions that because of the substantial leverage some banks use he would not be interested in investing in a bank even if was at a fair price because leverage could be to high. This can be seen in
Deutsche Bank which has leverage of almost 65 to 1. The leverage is so high it has recently asked shareholders to undertake a capital raising initiative. Even with this capital offering Deutsche Bank will still use more leverage than the average bank. When this amount of leverage is used a mistake by management will be magnified. Most of the European Banks have substantially more leverage than that of the U.S. meaning Buffett would likely not be interested in them despite their low prices.
Most of the American banks use substantially less leverage today than the 20 to 1 mentioned by Buffett that the banks typically used in 1990. Currently, PNC has leverage of 11 to 1 and Wells Fargo leverage is 13 to 1. This means these banks are extremely safe and well capitalized. These are two investments Warren Buffett would make if he were to invest in a bank today.
Bank of America Corporation (NYSE:BAC) hit a fresh 52-week low on Friday as worried that the foreclosure crisis may eat into BAC profit. The scandal involves foreclosures on houses by the banks without the necessary documentation and the foreclosure of houses using robo-signers which is when workers involved in forclosures indicate the documentation is present when it is not. J.P Morgan the second largest bank in the U.S. already took a charge in their third quarter report relating to the mortgage foreclosure scandal. Despite this charge JPM posted $4.4 billion of profit. Investors are afraid that Wells Fargo will have to report a similar charge. It has been reported Xee Moua a vice president of loan documentation for Wells Fargo, the second-largest US mortgage servicer, had pushed through 500 foreclosures a day. 
Shares of Wells Fargo plunged over 4% on worries of the foreclosure scandal which is brewing in the United States. The scandal involves foreclosures on houses by the banks without the necessary documentation and the foreclosure of houses using robo-signers which is when workers involved in forclosures indicate the documentation is present when it is not. J.P Morgan the second largest bank in the U.S. already took a charge in their third quarter report relating to the mortgage foreclosure scandal. Despite this charge JPM posted $4.4 billion of profit. Investors are afraid that Wells Fargo will have to report a similar charge. It has been reported Xee Moua a vice president of loan documentation for Wells Fargo, the second-largest US mortgage servicer, had pushed through 500 foreclosures a day.
Stocks of the largest financial institutions at midday. Wells Fargo is down 3%, JPM 3%, BAC 4.7%, C 2% PNC 1% USB is up .7% and BBT is down 0.83%. The banks are being sold off on "Robogate" which is a foreclosure scandal that could hit many of the nations lenders.
New York- Wells Fargo stock dropped 4.22% on the day as investors were concerned about the banks involvement in "robo-gate." The scandal involves foreclosures on houses by the banks without the necessary documentation and the foreclosure of houses using robo-signers which is when workers involved in forclosures indicate the documentation is present when it is not. It has been reported Xee Moua a vice president of loan documentation for Wells Fargo, the second-largest US mortgage servicer, had pushed through 500 foreclosures a day.
Stocks of the largest financial institutions were off as the markets open. Wells Fargo was down 4%, JPM 3%, BAC 4%, C 3.2% PNC 2.1% and USB is down 1.7%. The banks are being sold off on "Robogate" which is a foreclosure scandal that could hit many of the nations lenders.