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Warren Buffett is bullish on financial services companies. Despite of all the macro uncertainty, he hasn’t sold any of his financial services holdings in the last quarter. Instead, he increased his position in Wells Fargo (WFC) and M&T Bank (MTB). He also initiated a fresh long in Visa (V) by buying 2,291,708 shares. In addition, he also bought preferred shares of Bank of America (BAC). This clearly shows he believes there is value in financial services companies. The following is a list of his top financial holdings. In addition he owns $5bn worth of Bank of America’s preferred shares.

Stock

Symbol

Shares Held - 06/30/2011

Shares Held - 09/30/2011

Change in shares

Wells Fargo & Company

WFC

352327608

361369808

9042200

Moody's Corp.

MCO

28415250

28415250

0

American Express Company

AXP

151610700

151610700

0

Visa Inc.

V

0

2291708

2291708

Mastercard Incorporated

MA

405000

405000

0

The Bank of New York Mellon Corporation

BK

1793915

1793915

0

U.S. Bancorp

USB

69039426

69039426

0

M&T Bank Corp.

MTB

5363821

5382040

18219

Source: 13F filing

I like Wells Fargo, Visa, Mastercard (MA) and Bank of America the most among Warren Buffett’s top financial holdings. Visa Inc. and Mastercard are very good long-term investments as they will continue to benefit from the secular shift in spending from paper to plastic globally for the next several years. The current cyclical slowdown provides an attractive entry point in these stocks.

Wells Fargo is one of the well capitalized banks with a strong balance sheet. At current valuation of less than 8x forward PE, it appears to be a very good investment for investors with low risk appetite. For aggressive investors, I would recommend Bank of America. Its share price is lower than what it was in August when Warren Buffett invested in it. Over the past several weeks, BofA has executed on several asset sales that are consistent with management’s efforts to strengthen the balance sheet and improve the company’s overall capital position. I believe the market is completely neglecting some of the important steps taken by the bank to improve liquidity. For example:

  • BofA recently announced an agreement to sell most of its remaining stake in China Construction Bank. At September 30, BofA held 12.1 billion shares (~5%) of CCB with a carrying value of $7.2 billion, and a fair value of $7.7 billion. Out of this Bank of America will sell approximately 10.4 billion common shares through private transactions with a group of investors. Earlier also, on August 29, BofA sold 13.1 billion shares of CCB reducing its risk-weighted assets by $7.3 billion under Basel I. Together with some further realization of the deferred tax asset, the sale of the 10.4 billion CCB shares should generate about $2.9 billion of Tier 1 common capital boosting that ratio by 24bps.
  • BofA recently sold its stake in the Pizza Hut franchisee, for $755 million.
  • BofA’s previously announced sale of the Canadian card business is expected to close in 4Q11. It will free-up approximately $8 billion of RWA and as such will add another 7bps to the Tier 1 common capital ratio.

In addition to these transactions, Bank of America is also taking advantage of current market conditions, which are putting downward pressure on the market values of BofA’s debt and preferred stock issues, some of which are now trading below par. Management is issuing up to 400 million shares of common stock (3.9% of outstandings) and $3 billion in new senior notes to effectively replace roughly $6 billion of higher-cost preferred stock and/or trust preferred capital debt securities.

Once the eurozone stabilizes, the market will take notice of these confidence-building measures, which will be a positive catalyst for the stock.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Warren Buffett's Favorite Financial Services Companies