Warren Buffett is ‘very cautious’ about investing in bank stocks. Should you be?

A man holds his hand under his chin as he concentrates on his laptop screen and reads about the ANZ share price

A man holds his hand under his chin as he concentrates on his laptop screen and reads about the ANZ share price

Warren Buffett and Berkshire Hathaway co-founder Charlie Munger were in the spotlight on Saturday.

The two legendary investors, both in their 90s, didn’t miss a beat at Berkshire Hathaway’s annual general meeting. The event was attended by a massive crowd of some 40,000 people at a convention centre in Omaha, in the US state of Nebraska.

Among the highlights on the day, Warren Buffet – well-known as a value investor – sounded off on the ongoing US banking crisis.

What’s going on with Warren Buffett and bank stocks?

The Oracle of Omaha began divesting Berkshire’s sizeable holding of bank stocks in 2020.

And with the banking crisis that erupted in the US and Europe in March, that move looks to have been prescient.

The collapse of First Republic – the biggest bank failure since the 2008 GFC – followed on the heels of numerous other regional bank implosions in the US, including Silicon Valley Bank and Signature Bank. Financial contagion from the collapses led to a similar liquidity crunch at Credit Suisse, which was then scooped up by UBS.

Today Warren Buffet really only expresses confidence about one bank stock. Namely, Bank of America Corp (NYSE: BAC), in which he holds a 13% stake.

“I like Bank of America and I like the management,” he said, referring to long-time Bank of America CEO Brian Moynihan.

Drilling into First Republic, he said the bank’s long-term, low fixed-rate mortgages were “a crazy proposition”.

“It was doing it in plain sight and the world ignored it ‘til it blew up,” he said (quoted by Bloomberg). “The incentives in bank regulation are so messed up and so many people have an interest in having them messed up… So we are very cautious in a situation like that about ownership.”

And Warren Buffett was adamant that the banks’ bosses be held to account for their mistakes.

“The situation in banking is very similar to what it’s always been in banking – the fear is contagious, always,” he said. Adding that penalties should “hit the people that caused the problems”.

The Berkshire CEO said shareholders of bad banks should lose their investments. “We don’t know where shareholders of banks are going,” he said. “Banking can have all kinds of new inventions, but it needs to have old value.”

Should we be cautious of ASX 200 bank stocks?

To date, the banking crisis has largely been contained to the US and Europe.

But should we worry about the health of S&P/ASX 200 Index (ASX: XJO) bank stocks, which count as the best capitalised in the world?


Rob Shears, investment manager at Valor Private Wealth, points to the concerns Warren Buffett and Charlie Munger raised on bank loans to the real estate sector (courtesy of The Australian Financial Review).

“The banks extend and pretend. But we are starting to see the consequences of people who could borrow at 2.5%, see that it doesn’t work at higher rates and hand [the property] back,” Warren Buffett said. “Berkshire has never been active in commercial real estate.”

Sounding a warning note for potential problems ahead for ASX 200 bank stocks, Shears said:

The things that Warren and Charlie are warning about are things that Aussie investors have a lot in their industry super funds.

So banks are problematic in Australia, because of the residential property bubble. Commercial real estate, it’s still part of the Aussie banks and if you go around the city in Sydney and Melbourne, the offices are still empty.

Those problems may loom on the horizon.

But the big four bank stocks are all well into the green in late morning trade this Monday.

The post Warren Buffett is ‘very cautious’ about investing in bank stocks. Should you be? appeared first on The Motley Fool Australia.

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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Bank of America and Berkshire Hathaway. The Motley Fool Australia has recommended Berkshire Hathaway. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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