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A Bank Portfolio Of 12 High Quality 'Buffett Banks'

Richard J. Parsons profile picture
Richard J. Parsons


  • In this second in a series of posts about long-term banking investing, I describe Warren Buffett's enthusiasm for banks at a time of record earnings but awful stock price action.
  • In this post, I overview the investment selection criteria used by Buffett's mentor, Benjamin Graham, and apply that to 12 banks I deem to be "High Quality."
  • Investors indiscriminately dumped banks during the second half of 2018, creating an opportunity for Buffett and prudent investors to buy High Quality banks at reasonable valuations.
  • A dozen banks with superior Risk-Adjusted Returns of Equity are now selling at Price to Tangible Book Value ratios worthy of investor attention.
  • In this post, I identify those 12 High Quality banks and show why they are "Buffett Banks" using the investment criteria of his mentor, Benjamin Graham.


This is the second in a series of article discussing long-term bank investing. Material for this series will be used for a second edition of my book about bank investing (Investing in Banks, RMA, 2016) that the publisher plans to release this year.

Objectives for this post:

  • First, provide a snapshot of Warren Buffett's bank investment portfolio as well as an explanation why individual investors have an advantage over Buffett when it comes to bank investing.
  • Second, describe your advantage as a bank investor over Buffett.
  • Third, highlight the criteria for investment selection used by Buffett's mentor, Benjamin Graham.
  • Fourth, apply that criteria to 12 High Quality banks with 15-year industry leading Risk-Adjusted Return of Equity and also are currently priced at valuations favorable to history.
  • Fifth, offer a high level overview of the pluses and minuses associated with 8 of the 12 High Quality banks.
  • Finally, identify two principal risks associated with this strategy.

I. Buffett and Berkshire Hathaway

Ten years ago, Buffett owned four banks, Wells Fargo (WFC), American Express (AXP), U.S. Bancorp (USB), and M&T Bank Corp. (MTB). Since 2008 he has added six more banks. In Q3, 2018, Berkshire (BRK.A) (BRK.B) made major investments in JPMorgan Chase (JPM) and PNC (PNC) for the first time. For an informative overview of Berkshire Hathaway's 3Q 2018 holdings, check out this recent Seeking Alpha article by John Vincent.

What does Buffett know that you might know? Why would he own so many banks? Is he crazy?

That's obviously a loaded question. It's been interesting to read Seeking Alpha commentary and reader comments that question Buffett's acumen. Most note quite accurately that Berkshire Hathaway suffered enormous paper losses in 4Q. One particularly compelling Seeking Alpha article posted in December posed this reasonable question: "Berkshire Hathaway: Are Warren Buffett & Co. Losing

This article was written by

Richard J. Parsons profile picture
Richard J. Parsons is a former banker who writes about the banking industry as well as market risk. He is currently working on his third book about banks. His first book, "Broke: America's Banking System" (2013, RMA), describes why the industry is prone to catastrophic cycles that produced 3,000 bank failures in the U.S. between 1985 and 2012. The second book, "Investing in Banks" (2016, RMA) examines why a small group of elite banks of all sizes consistently overperform the industry over time and through the ups and downs of business cycles. The new book will update "Investing in Banks" with data from 2016-2021. Parsons is a frequent contributor to The Risk Management Journal. He teaches the Advanced Operational Risk Management course for the RMA. Prior to writing and speaking about the banking industry, Parsons spent more than 31 years at Bank of America where he was an executive vice president and member of the Management Operating Committee. In his last role he chaired the bank’s Operational and Compliance Risk Committee and the Emerging Risk Committee. Parsons has a BA in history from Ohio Wesleyan University and an MBA from the University of Virginia Darden School of Business.

Analyst’s Disclosure: I am/we are long BOKF, CFR, LKFN, SIVB, SYBT, BRK.B. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (90)

Banks are changing to fee based business models last few years. Banks charge their clients more and more for their business on a fee basis. So they become more and more independent from intrest rates going down or up. It will be a matter of time before the great public realises this changing environment.
At this moment European banks are cheaper than Us banks. For example Commerzbank (ticker : CBKG) trades at a price to book value of 0.24 with a dividend yield of about 4% and a book value per share of 22.5 euro. The stock price is euro 4,985. A great stock with a great future and with the coming consolidation of banks in Europe this is one of the best stocks to buy and hold.
gilja61 profile picture
@Richard J. Parsons what are your thoughts of TCBI 1st quarter report? Interesting that they have been reviewing their portfolio recently, but the report looks like a mess. Any thoughts would be appreciated.
Richard J. Parsons profile picture
Based on comments made in Q1 call, I sold my TCBI position shortly thereafter. TCBI is doing business in one of the best markets in country so I think it will be just fine long-term. That said, the risk profile is higher than I like. CFR is a good way to get DFW/TX exposure, though more expensive than TCBI.
Benny Maimonides profile picture

No doubt $WF wanted you to buy the insurance from Buffett. One hand washes the other, except when both are dirty.
One transgression which the bank regulators have not yet gotten around to regulating: banks trying to force flood insurance on waterfront home owners. A few years ago Wells Fargo told us to obtain flood insurance on our Rhode Island waterfront home -- or else. Wells held the mortgage on our home and the premium would have cost us $340 per month! The potential for flooding reaching the house was rated at 2% each one hundred years. Even the Great New England Hurricane of 1938 and Carol in 1954 did not flood the site. So, we just paid off the mortgage, But we really felt that WFC was unreasonable in their handling the matter and have never used the bank since and never will. Forever is a long, long time.
stevesteve profile picture
Nothing is forever. I'm not really a fan of WFC either.
GrahamValue profile picture
Great application of Graham's framework!

> For a detailed overview of how I applied the Graham criteria to banks, a topic Graham did not review in his book, see my book, chapters 9 and 10.

Graham actually did give slightly different criteria for evaluating Public Utilities and Financial Enterprises.

They have been discussed in the following article:

"Updating Benjamin Graham's Intrinsic Values And Evaluating Financial Enterprises" - seekingalpha.com/...

For example, given below are ratings for US Bancorp (USB) based on Graham's investment framework from his book — The Intelligent Investor — adjusted only for inflation and bond yields.

Size in Sales (100% ⇒ 500 Million): 4,370.40%
Current Assets ÷ [2 x Current Liabilities]: 0.00%
Net Current Assets ÷ Long Term Debt: 0.00%
Earnings Stability (100% ⇒ 10 Years): 120.00%
Dividend Record (100% ⇒ 20 Years): 100.00%
Earnings Growth (100% ⇒ 33% Growth): 148.55%
Graham Number(%): 93.29%
NCAV or Net-Net(%): 0.00%
[2 x Equity] ÷ Debt: 24.09%
Size in Assets (100% ⇒ 250 Million): 184,816.00%

The ratings are defined such that Graham's Defensive requirements default to 100%.

A Defensive Graham grade requires that all ratings — except the last four — be 100% or more.

Utilities and Financials will need to have the last two ratings at 100% or more instead of the first three.

An Enterprising Graham grade requires minimum ratings of — N/A, 75%, 90%, 50% and 5%.
IBWO profile picture
That's good Richard - thanks - and I want to make sure it stands out in the comments section in case investors miss what you wrote plus i provided a bit more detail about their violations of the law
Richard J. Parsons profile picture
I have written extensively on governance failures at WFC. Here are links to the three most recent. See also my comments above re WFC. See seekingalpha.com/... and seekingalpha.com/... and seekingalpha.com/...
IBWO profile picture
Wells Fargo:
"Mississippi will receive more than $2.5 million of a $575 million multistate settlement reached with Wells Fargo to resolve claims that the bank violated state consumer protection laws"

"The Consumer Financial Protection Bureau is levying a $1 billion fine against Wells Fargo — a record for the agency — as punishment for the banking giant's actions in its mortgage and auto loan businesses"

"Over the past year and a half, Wells Fargo has admitted to creating fake accounts, hitting customers with unfair mortgage fees and charging people for car insurance they didn't need.
Fake-accounts scandal breaks wide open. Federal regulators reveal Wells Fargo employees secretly created millions of unauthorized bank and credit card accounts without their customers knowing it. The bank is hit with a $185 million fine. Wells Fargo says 5,300 employees were fired for related reasons"

"Wells Fargo is accused of illegally repossessing military service members' cars. The company agrees to pay $24 million to settle charges. The DOJ claims the bank took 413 cars without a court order, which violates federal law. The company apologizes and commits to refunds"
Benny Maimonides profile picture

All very true in $MS and true in other states as well.

Funny how Charlie Munger still defend $WF, saying the gubmint is too tough on his favorite bank.

Maybe he and Warren should buy the whole thing and stick it in the opaque box with the rest of their collection of broken toys.
Elr10 profile picture
Great article , thanks ! do you follow any EU banks, any thoughts on ING, Soc Gen or BNP?
nicholas davout profile picture
Shouldn't your point be that Buffet has lost billions investing in US banks? Not to mention billions lost on AAPL, IBM and many of his other investments.
Benny Maimonides profile picture
@nicholas davout

That should be the point and the focus but the followers of Warren only read and believe his annual letter. The bible according to Buffett.
Triple F Fred profile picture
Mr Parsons,

Thanks for the very well done article on potential banking enterprise investments. I am old enough to remember the Butcher banking debacle in Tennessee in the late 70s and early 80s.

That along with the savings and loan failures in the same time frame had a great deal to do with the changes in regulations that were implemented afterwards. Although quite a few unscrupulous practices were expunged from the system, other similar types of banking scandals have happened since.

Excellent work sir, I am now a follower and will be investigating some of your suggestions.

Much Thanks!

Finici profile picture
Good to see you Fred - hope all is well...

Good Article. Buffet recently purchased BK which is missing in your Y chart xxxx .
Also Buffet missed the Canadian Banks which escaped the financial crisis of the last decade. - Max
Richard J. Parsons profile picture
SA's source has confused Preferred Dividend for Common. Mistake.
I am confused. under the ticker TCBI, the seeking alpha page shows that they pay a $ 1.62 dividend for a 3% yield. then this info about declaring a dividend - seekingalpha.com/... - but under dividend history, seeking alpha shows no history of paying a dividend. Can I be lazy and let you answer this puzzle for me?
BOH, is this bank insulated from most mainland problems?
14 Jan. 2019
Anyone have a feel on what JPM price action MIGHT be on tomorrows earnings? Just looking for sentiment to factor in to my analysis of when to pull the trigger. Thanks.
birder profile picture
I have been buying some bank stocks recently because they have been beaten down so much. I am more interested in dividends than stock repurchases. HBAN, KEY, JPM, and UMPQ. I would not own WFC under any circumstances Run by a bunch of crooks.
The valuation of banks is good at this time, my favorite banks are JPM, WFC, for the long term.
CapVandal profile picture

C is getting beaten like a rented mule after printing a good quarter and year. They bought back 9% of their stock as well as paying 3,2% dividend,
Richard J. Parsons profile picture
wolf, agree with you about AROW and several other Upper State NY community banks. AROW is clearly a standout bank. High RAROE. I just checked the index of my 2016 book and found that I mentioned AROW six times in my book about bank investing. The number of references reflects AROW's outstanding history of achieving consistent ROEs that exceed cost of capital. Wonderful example of smaller, well-managed bank that flies beneath the radar of a lot of investors. Current Graham Multiple of 24 suggests it is not cheap. It is comparable to a LKFN or SYBT in my view. One other reason to like AROW is that you have a number of smart competitors, most notably CBU. History shows that part of the state has done a great job developing sound banking practices and prudent risk managers. RJP
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