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金猪宝宝
2020-08-20

Bank Of America Vs. Wells Fargo Vs. JPMorgan: Warren Buffett Might Have Made A Mistake

Warren Buffett has recently reduced exposure to JPM and WFC and increased his exposure to BAC.JPM is just as good as BAC and trades at a similar multiple. There is no reason to favor BAC over JPM.WFC has several major operational challenges, but the stock is far cheaper than JPM and BAC and Mr. Buffett might be reducing too late to avoid a downside.On this occasion, investors might as well not copy Mr. Buffett.

Bank Of America Vs. Wells Fargo Vs. JPMorgan: Warren Buffett Might Have Made A Mistake

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Wells Fargo Vs. JPMorgan: Warren Buffett Might Have Made A Mistake","url":"https://stock-news.laohu8.com/highlight/detail?id=2060984004","media":"FIG Ideas","summary":"Warren Buffett has recently reduced exposure to JPM and WFC and increased his exposure to BAC.JPM is just as good as BAC and trades at a similar multiple. There is no reason to favor BAC over JPM.WFC has several major operational challenges, but the stock is far cheaper than JPM and BAC and Mr. Buffett might be reducing too late to avoid a downside.On this occasion, investors might as well not copy Mr. Buffett.","content":"<html><body><div><div><div><div>Summary</div><div><p>Warren Buffett has recently reduced exposure to JPM and WFC and increased his exposure to BAC.</p><p>JPM is just as good as BAC and trades at a similar multiple. There is no reason to favor BAC over JPM.</p><p>WFC has several major operational challenges, but the stock is far cheaper than JPM and BAC and Mr. Buffett might be reducing too late to avoid a downside.</p><p>On this occasion, investors might as well not copy Mr. Buffett.</p></div></div></div><div><p>Warren Buffett reduced Berkshire Hathaway's <span>(NYSE:BRK.A)</span> <span>(NYSE:BRK.B)</span> 13F positions in some major US Banks in the second quarter of 2020, including JPMorgan (JPM) and Wells Fargo (WFC). JPM was reduced by 40% to below 1% of the portfolio, and WFC was reduced by 27% to 3% of the portfolio. After the quarter-end, he increased the position in Bank of America, (BAC), taking the ownership stake to 12%.</p> <p>Anyone wishing to study Mr. Buffett's recent portfolio changes could do worse than read this useful article from Seeking Alpha contributor John Vincent.</p> <h3><strong>Warren Buffett is an excellent model, but he is not infallible </strong></h3> <p>It is not for nothing that Warren Buffett's wisdom, wit and portfolio moves are closely followed by Seeking Alpha readers. Not only does he have an extraordinary track record of investment success, the reasoning behind his investment decisions is generally easy to digest and fits with most people's ideas of sound common sense.</p> <p>Still, an important principle of investing is self-reliance. Let's remember that Mr. Buffett is human, and occasionally makes mistakes.</p> <p>One I remember well, (because I was running a fund professionally which held a large position in the stock concerned!) is Mr. Buffett's sale of Munich Re (MUV2) in September 2015. While acknowledging that the company was very well run and that he may be wrong in the decision, Mr. Buffett explained the move through reference to the poor long-term prospects of the reinsurance industry at a time of very low interest rates.</p> <p><img loading=\"lazy\" src=\"https://static.seekingalpha.com/uploads/2020/8/16/41885436-15975935881031616.png\"/></p>\n<div></div> <p>Source: Yahoo Finance</p> <p>From the levels Mr. Buffett sold at, MUV2 appreciated nearly 70% before the COVID-19 panic sell-off in March this year, and with its dividends over that period gave a total return of 102%. Even after the March crash and partial recovery, total returns are 77% since Mr. Buffet's exit, a very healthy return over a five-year period. Selling MUV2 wasn't the most successful decision.</p> <p>Turning to his reduction of large US bank exposure in 2Q, it isn't hard to see the headwinds facing the sector.</p> <p>Interest rates have been slashed, and this pressurises bank earnings because net interest income is typically more than half of US banks' operating revenue. At the same time, the extreme disruption of COVID-19 to exposed business sectors will cause a large wave of non-performing loans to hit the banks in the second half of the year. This will eat into the hefty provision buffers built in the first half, and further high charges to restock these buffers are possible.</p> <h3><strong>Where might Buffett be going wrong? </strong></h3> <p>Mr. Buffett made two moves that are worth examining. The general reduction in bank stocks and in particular JPM and WFC, then, after the second quarter, the increase of exposure to BAC.</p> <p>Banks are down around 27% from pre-COVID-19 levels. This is a big hit. But it does not assume a disaster on the scale of 2008-9. In contrast to that crisis, when the banks were more leveraged and faced an \"unknown\" element of the crisis in the way that mezzanine bonds and credit default swaps would transfer risk in the financial system, the COVID-19 crisis is so far better understood and has been provided for in advance of the credit damage manifesting (made possible by government support for incomes in the economy). Banks have built additional large provisions while remaining in the black or posting only moderate losses that have not materially impacted capital adequacy. They can keep doing this going forward if they need to.</p> <p>While dramatically elevated provisioning expense will go on for a period, then alleviate as the economy recovers, the low interest rates triggered by the crisis will endure at least for some time beyond the crisis.</p>\n<div></div> <p>Investors should have a sense of what is already in the price.</p> <p>The following model takes the bank that Warren Buffett does still like, BAC, and runs stable costs and provisions, but depressed income (somewhat worse than the 2Q'20 situation when non-interest income remained robust) to simulate what earnings might look like after provision charges normalise with income remaining weak.</p> <p><img loading=\"lazy\" src=\"https://static.seekingalpha.com/uploads/2020/8/16/41885436-15975956688655179.png\"/></p> <p>Source: Company quarterly results data, analyst model</p> <p>BAC would of course be able to take some action on costs and, as the economy comes back, there should be at least some improvement in non-interest income so I would regard this as a conservative look through to \"normalised\" post-COVID-19 earnings. The stock is down 25% from its pre-COVID-19 peak, which makes sense opposite the level of bottom line change in this model.</p> <p>Now, if you run a similar exercise on JPMorgan and Wells Fargo, both of which Buffett reduced, you get similar tie-ins with stock price performance.</p> <ul> <li>JPM sees a 24% hit to earnings, and the stock is 24% down.</li> <li>WFC sees a greater than 50% hit to earnings, and the stock is more than 50% down.</li> </ul> <p>So JPM looks very similar to BAC. Why such a serious hit to WFC? There are four reasons:</p> <ul> <li>A greater share of net interest income in the revenue mix, equates to a greater hit from low interest rates on overall revenue and the bottom line.</li> <li>The Fed asset cap preventing asset volume expansion to offset margin pressure.</li> <li>A greater hit to non-interest income due to a smaller trading business.</li> <li>Upward pressure on costs, due to re-engineering expenses and costs associated with the aftermath of its 2016 accounts scandal.</li> </ul> <p>The market looks for BAC and JPM to have recovered, or nearly recovered, 2019 EPS levels by 2022. WFC is expected to still be below the 2019 level, by 9%. The main drag factors in the outlook are the asset cap (the date of removal is guesswork when modelling future earnings) and the tilt toward net interest revenue in the income mix with rates remaining super low for longer.</p>\n<div></div> <p><img loading=\"lazy\" src=\"https://static.seekingalpha.com/uploads/2020/8/16/41885436-15976013874458928.png\"/></p> <p>Source: Nasdaq Earnings</p> <p>JPM and BAC look similar in terms of valuation (P/E Ratio). WFC looks very cheap. It offers strong upside if it can meet its peers' P/E ratios by 2022, and don't forget, the whole sector may have improved its valuation by that point if risks have receded.</p> <p><img loading=\"lazy\" src=\"https://static.seekingalpha.com/uploads/2020/8/16/41885436-159760215300681.png\"/></p> <p>Source: Nasdaq Earnings</p> <h3><strong>Mr. Buffett's first potential mistake here is reducing WFC at such a low valuation.</strong></h3> <p>Berkshire Hathaway has ridden WFC down from its days trading at a premium valuation and I think a sale at this point comes near a potential turning point in the shares, and risks selling at the bottom. As I showed in recent articles about WFC, the franchise is solid and extraneous factors like the asset cap and settlement charges are temporary impediments, the alleviation of which will allow it to move forward. Do read the articles to get the full story. The key point is that once these well-understood problems are dealt with, there is no reason for WFC to trade at a valuation discount to the likes of JPM or BAC.</p> <h3><strong>The second potential mistake is favoring BAC over JPM</strong></h3> <p>Reducing JPM is also a curious move, given that it is on a similar valuation to BAC and is, at the least, a similar quality banking business.</p> <p>For example, in the current environment, JPM holds the advantage of generating a higher percentage of its operating revenue through non-interest-based sources, which have improved further in the first half of 2020.</p>\n<div></div> <p><img loading=\"lazy\" src=\"https://static.seekingalpha.com/uploads/2020/8/17/41885436-15976403541863408.png\"/></p> <p>Source: Company quarterly results data</p> <p>While BAC's operating revenue declined 3.3% over the last five quarters, with a boost in trading income only partially offsetting pressure on net interest income, JPM saw a revenue gain of nearly 15% YoY.</p> <p><img loading=\"lazy\" src=\"https://static.seekingalpha.com/uploads/2020/8/17/41885436-15976405454846377.png\"/></p> <p>Source: Company quarterly results data</p> <p>The valuation of JPM, of course, hasn't gained relative to BAC because trading revenue, though welcome during a period such as this, is hard to predict and therefore doesn't attract a high P/E from the market. That said, it is difficult to see JPM stock as <em>less</em> attractive than BAC, given the similarity in valuation.</p> <p>It's no surprise to see JPM running a better efficiency ratio (operating costs/operating revenue) in 2Q this year due to this boost to trading income. However, in recent prior quarters, it also has a slight advantage over BAC.</p> <p><img loading=\"lazy\" src=\"https://static.seekingalpha.com/uploads/2020/8/17/41885436-15976421409906173.png\"/></p> <p>Source: Company quarterly results data</p> <p>Overall, then, the JPM sale doesn't make much sense in terms of revenue composition and performance, nor in operating margin and efficiency, again given that investors pay a similar P/E ratio for the two stocks.</p> <h3><strong>Capital adequacy: JPM is the winner </strong></h3>\n<div></div> <p>At times of strain in the economy, investors tend to pay a little more attention to capital adequacy in banks. As closely regulated G-SIBS, the banks we are looking at in this article all have strong capital ratios. JPM runs a higher capital buffer than the other two banks given its business composition. If anything, JPM holds the edge over BAC and WFC here.</p> <p><img loading=\"lazy\" src=\"https://static.seekingalpha.com/uploads/2020/8/17/41885436-1597642623118259.png\"/></p> <p>Source: Company quarterly results data</p> <h3><strong>Conclusion</strong></h3> <p>JPM and BAC trade at similar valuations, and JPM arguably is more robust in the current environment while being slightly better suited than BAC to a very low rate environment going forward due to its income mix.</p> <p>WFC undoubtedly has more operating challenges than its two peers looked at here, but the stock reflects this in a much lower P/E ratio (2022). This means that WFC offers a great deal more upside than either JPM or BAC should management prove able to tackle the bank's problems. It is difficult to see the market tolerating failure in this respect.</p> <p>At your next lunch with Warren Buffett, take this article with you and ask him why he favors BAC when JPM may be better suited to the current environment and costs the same in terms of P/E, and WFC offers greater upside if management take the necessary remedial actions.</p> <p>If you found this article useful, please consider following me using the button at the top.</p>\n<span></span><p><b>Disclosure:</b> <span>I/we have no positions in any stocks mentioned, but may initiate a long position in WFC over the next 72 hours.</span> <span>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.</span></p></div><div><div></div><span><svg height=\"16\" viewbox=\"5.799999713897705 7.799999237060547 20.30000114440918 16.39999771118164\" width=\"16\"><path d=\"M26.1 9.7c-.7.3-1.5.6-2.4.7.9-.5 1.5-1.3 1.8-2.3-.8.5-1.7.8-2.6 1-.8-.8-1.8-1.3-3-1.3-2.3 0-4.1 1.9-4.1 4.1 0 .3 0 .6.1.9-3.4-.2-6.5-1.8-8.5-4.3-.4.7-.7 1.4-.7 2.1 0 1.4.7 2.7 1.8 3.4-.7 0-1.3-.2-1.9-.5v.1c0 2 1.4 3.7 3.3 4.1-.3.1-.7.1-1.1.1-.3 0-.5 0-.8-.1.5 1.6 2.1 2.8 3.9 2.9-1.4 1.1-3.2 1.8-5.1 1.8-.3 0-.7 0-1-.1 1.8 1.2 4 1.9 6.4 1.9 7.6 0 11.8-6.3 11.8-11.8v-.5c.8-.6 1.5-1.3 2.1-2.2zm0 0\" fill=\"#FFFFFF\"></path></svg><svg height=\"18\" viewbox=\"11.000001907348633 6.799999713897705 9.999998092651367 18.600000381469727\" width=\"10\"><path d=\"M20.6 6.8h-2.4c-2.7 0-4.4 1.8-4.4 4.6v2.1h-2.4c-.2 0-.4.2-.4.4v3c0 .2.2.4.4.4h2.4V25c0 .2.2.4.4.4h3.1c.2 0 .4-.2.4-.4v-7.7h2.8c.2 0 .4-.2.4-.4v-3c0-.1 0-.2-.1-.3-.1-.1-.2-.1-.3-.1h-2.8v-1.8c0-.9.2-1.3 1.3-1.3h1.6c.2 0 .4-.2.4-.4V7.1c0-.2-.2-.3-.4-.3zm0 0\" fill=\"#FFFFFF\"></path></svg><svg height=\"16\" viewbox=\"6.200000286102295 6.699999809265137 19.5 18.700000762939453\" width=\"14\"><path d=\"M25.7 18.2v7.2h-4.2v-6.7c0-1.7-.6-2.8-2.1-2.8-1.2 0-1.8.8-2.1 1.5-.1.3-.1.6-.1 1v7H13s.1-11.4 0-12.6h4.2v1.8c.6-.9 1.5-2.1 3.8-2.1 2.7 0 4.7 1.8 4.7 5.7zM8.6 6.7c-1.4 0-2.4.9-2.4 2.2 0 1.2.9 2.2 2.3 2.2 1.5 0 2.4-1 2.4-2.2 0-1.2-.8-2.2-2.3-2.2zM6.5 25.4h4.2V12.8H6.5v12.6zm0 0\" fill=\"#FFFFFF\"></path></svg><svg height=\"14\" viewbox=\"4.5 6.499999523162842 22.900001525878906 18.999998092651367\" width=\"18\"><path d=\"M20.9 16.9c.1.2.1.3.1.5 0 .3-.1.6-.3.9-.2.2-.4.4-.7.5-.1 0-.3.1-.4.1-.3 0-.7-.1-.9-.3-.3-.2-.5-.5-.5-.8v-.3c0-.3.1-.6.3-.8.2-.2.4-.4.7-.5.2-.1.3-.1.5-.1.3 0 .6.1.8.3.1 0 .3.2.4.5zm-.9 3.7c-.1-.1-.3-.1-.4-.1-.1 0-.2 0-.3.1-1 .6-2.2.9-3.4.9-.9 0-1.8-.2-2.6-.6-.1 0-.3-.2-.4-.3-.1 0-.2-.1-.2-.1-.1 0-.2-.1-.3-.1-.1 0-.2 0-.3.1-.1.1-.2.1-.3.3-.1.1-.1.3-.1.4 0 .1 0 .2.1.4.1.1.1.2.3.3 1.1.8 2.5 1.1 3.8 1.1 1.2 0 2.4-.3 3.5-.8.1-.1.3-.2.5-.3.1-.1.2-.1.3-.2.1-.1.1-.2.2-.3v-.2c0-.1 0-.2-.1-.3l-.3-.3zm-8-1.9c.2.1.3.1.5.1.4 0 .7-.2 1-.4.3-.2.5-.6.5-1v-.1c0-.4-.2-.7-.5-1-.3-.2-.6-.4-1-.4h-.3c-.5.1-.9.5-1.1 1 0 .1-.1.3-.1.4 0 .3.1.6.3.9.2.3.4.4.7.5zm15.4-3.6v.2c0 .6-.2 1.1-.5 1.5-.3.4-.7.8-1.1 1v.7c0 1.2-.4 2.4-1.1 3.3-1.3 1.8-3.4 2.8-5.4 3.3-1.1.3-2.2.4-3.4.4-1.7 0-3.4-.3-4.9-.9-1.6-.7-3.2-1.7-4.1-3.3-.5-.8-.8-1.8-.8-2.8v-.7c-.4-.2-.8-.6-1.1-1-.3-.4-.5-1-.5-1.5 0-.8.3-1.5.8-2s1.2-.9 2-.9h.2c.4 0 .8.1 1.1.2.3.1.6.3.9.5.1 0 .2-.1.3-.1 1.7-1 3.6-1.4 5.4-1.5 0-.9.1-1.9.6-2.7.4-.7 1-1.3 1.8-1.4.3-.1.6-.1.9-.1.8 0 1.6.2 2.3.5.3-.5.8-.9 1.3-1.1.3-.1.7-.2 1-.2.4 0 .7.1 1.1.2.5.2.9.5 1.2 1 .4.4.6.9.6 1.5v.3c-.1.7-.4 1.3-.9 1.7-.5.4-1.1.7-1.8.7H23c-.6 0-1.3-.4-1.7-.8-.4-.5-.7-1.1-.7-1.8v-.1c-.6-.3-1.3-.5-1.9-.5h-.3c-.5 0-.9.4-1.1.8-.3.6-.4 1.4-.4 2.1 1.8.1 3.7.6 5.3 1.5 0 0 .1 0 .1.1.1-.1.2-.2.4-.3.5-.3 1.1-.5 1.7-.5.3 0 .5 0 .8.1.6.2 1.1.5 1.5 1 .4.4.7 1 .7 1.6zm-5.4-6s0 .1 0 0c0 .4.2.7.4.9.2.2.5.4.8.4h.1c.3 0 .6-.1.9-.4.2-.2.4-.5.4-.8v-.1c0-.3-.2-.6-.4-.9-.2-.2-.6-.4-.9-.4H23c-.3.1-.5.2-.7.4-.2.4-.3.6-.3.9zm-13.6 5c-.2-.1-.5-.2-.8-.2h-.1c-.4 0-.7.2-1 .4-.3.3-.5.6-.5 1v.1c0 .2.1.5.2.7.1.2.2.3.3.4.5-1 1.2-1.8 1.9-2.4zm16.1 4.5c0-.8-.3-1.7-.8-2.3-1-1.3-2.4-2.2-4-2.7-.3-.1-.6-.2-.9-.2-.9-.3-1.9-.4-2.8-.4-1.2 0-2.5.2-3.7.6-1.5.5-3 1.4-4 2.7-.5.7-.8 1.5-.8 2.3 0 .3 0 .6.1.9.2.7.5 1.3 1 1.8.4.5 1 1 1.6 1.3.1.1.3.2.4.2 1.7.9 3.6 1.3 5.4 1.3h1c1.9-.2 3.8-.7 5.4-1.9.5-.4.9-.8 1.3-1.3s.6-1.1.7-1.7c0-.2.1-.4.1-.6zm1.5-3.3c0-.2 0-.4-.1-.6-.1-.3-.3-.5-.6-.6-.3-.1-.6-.2-.8-.2-.3 0-.5.1-.8.2.8.7 1.4 1.4 1.8 2.4.1-.1.3-.3.3-.4.1-.3.2-.6.2-.8zm0 0\" fill=\"#FFFFFF\"></path></svg><svg height=\"10\" viewbox=\"4.699999809265137 8.300000190734863 22.599998474121094 15.40000057220459\" width=\"16\"><path d=\"M4.7 8.3v2.5L16 17l11.3-6.1V8.3H4.7zm0 3.7v11.7h22.6V12L16 18.1 4.7 12z\" fill=\"#FFFFFF\"></path></svg><svg height=\"14\" viewbox=\"87.43199920654297 227.56399536132812 422.6809997558594 382.7259826660156\" width=\"20\"><g><g><rect fill=\"none\" height=\"42.929\" width=\"42.929\" x=\"421.615\" y=\"375.172\"></rect><g><rect fill=\"none\" height=\"42.929\" width=\"42.929\" x=\"421.615\" y=\"375.172\"></rect><path d=\"M87.432,332.244v193.283h85.424v84.763h251.855v-84.763h85.402V332.244H87.432z M383.309,568.021H214.237 v-105.67h169.072V568.021z M464.543,418.101h-42.929v-42.929h42.929V418.101z\" fill=\"#FFFFFF\"></path></g></g><rect fill=\"#FFFFFF\" height=\"84.536\" width=\"253.609\" x=\"175.93\" y=\"227.564\"></rect></g></svg></span></div></div></body></html>","source":"seekingalpha","collect":0,"html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Bank Of America Vs. Wells Fargo Vs. JPMorgan: Warren Buffett Might Have Made A Mistake</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nBank Of America Vs. Wells Fargo Vs. JPMorgan: Warren Buffett Might Have Made A Mistake\n</h2>\n\n<h4 class=\"meta\">\n\n\n2020-08-18 22:50 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4369477-bank-of-america-vs-wells-fargo-vs-jpmorgan-warren-buffett-might-made-mistake><strong>FIG Ideas</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>SummaryWarren Buffett has recently reduced exposure to JPM and WFC and increased his exposure to BAC.JPM is just as good as BAC and trades at a similar multiple. There is no reason to favor BAC over ...</p>\n\n<a href=\"https://seekingalpha.com/article/4369477-bank-of-america-vs-wells-fargo-vs-jpmorgan-warren-buffett-might-made-mistake\">Web Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","type":0,"thumbnail":"","relate_stocks":{"BRK.B":"伯克希尔B","WFC":"富国银行","JPM":"摩根大通","BAC":"美国银行","BRK.A":"伯克希尔"},"source_url":"https://seekingalpha.com/article/4369477-bank-of-america-vs-wells-fargo-vs-jpmorgan-warren-buffett-might-made-mistake","is_english":true,"share_image_url":"https://static.laohu8.com/5a36db9d73b4222bc376d24ccc48c8a4","article_id":"2060984004","content_text":"SummaryWarren Buffett has recently reduced exposure to JPM and WFC and increased his exposure to BAC.JPM is just as good as BAC and trades at a similar multiple. There is no reason to favor BAC over JPM.WFC has several major operational challenges, but the stock is far cheaper than JPM and BAC and Mr. Buffett might be reducing too late to avoid a downside.On this occasion, investors might as well not copy Mr. Buffett.Warren Buffett reduced Berkshire Hathaway's (NYSE:BRK.A) (NYSE:BRK.B) 13F positions in some major US Banks in the second quarter of 2020, including JPMorgan (JPM) and Wells Fargo (WFC). JPM was reduced by 40% to below 1% of the portfolio, and WFC was reduced by 27% to 3% of the portfolio. After the quarter-end, he increased the position in Bank of America, (BAC), taking the ownership stake to 12%. Anyone wishing to study Mr. Buffett's recent portfolio changes could do worse than read this useful article from Seeking Alpha contributor John Vincent. Warren Buffett is an excellent model, but he is not infallible  It is not for nothing that Warren Buffett's wisdom, wit and portfolio moves are closely followed by Seeking Alpha readers. Not only does he have an extraordinary track record of investment success, the reasoning behind his investment decisions is generally easy to digest and fits with most people's ideas of sound common sense. Still, an important principle of investing is self-reliance. Let's remember that Mr. Buffett is human, and occasionally makes mistakes. One I remember well, (because I was running a fund professionally which held a large position in the stock concerned!) is Mr. Buffett's sale of Munich Re (MUV2) in September 2015. While acknowledging that the company was very well run and that he may be wrong in the decision, Mr. Buffett explained the move through reference to the poor long-term prospects of the reinsurance industry at a time of very low interest rates. \n Source: Yahoo Finance From the levels Mr. Buffett sold at, MUV2 appreciated nearly 70% before the COVID-19 panic sell-off in March this year, and with its dividends over that period gave a total return of 102%. Even after the March crash and partial recovery, total returns are 77% since Mr. Buffet's exit, a very healthy return over a five-year period. Selling MUV2 wasn't the most successful decision. Turning to his reduction of large US bank exposure in 2Q, it isn't hard to see the headwinds facing the sector. Interest rates have been slashed, and this pressurises bank earnings because net interest income is typically more than half of US banks' operating revenue. At the same time, the extreme disruption of COVID-19 to exposed business sectors will cause a large wave of non-performing loans to hit the banks in the second half of the year. This will eat into the hefty provision buffers built in the first half, and further high charges to restock these buffers are possible. Where might Buffett be going wrong?  Mr. Buffett made two moves that are worth examining. The general reduction in bank stocks and in particular JPM and WFC, then, after the second quarter, the increase of exposure to BAC. Banks are down around 27% from pre-COVID-19 levels. This is a big hit. But it does not assume a disaster on the scale of 2008-9. In contrast to that crisis, when the banks were more leveraged and faced an \"unknown\" element of the crisis in the way that mezzanine bonds and credit default swaps would transfer risk in the financial system, the COVID-19 crisis is so far better understood and has been provided for in advance of the credit damage manifesting (made possible by government support for incomes in the economy). Banks have built additional large provisions while remaining in the black or posting only moderate losses that have not materially impacted capital adequacy. They can keep doing this going forward if they need to. While dramatically elevated provisioning expense will go on for a period, then alleviate as the economy recovers, the low interest rates triggered by the crisis will endure at least for some time beyond the crisis.\n Investors should have a sense of what is already in the price. The following model takes the bank that Warren Buffett does still like, BAC, and runs stable costs and provisions, but depressed income (somewhat worse than the 2Q'20 situation when non-interest income remained robust) to simulate what earnings might look like after provision charges normalise with income remaining weak.  Source: Company quarterly results data, analyst model BAC would of course be able to take some action on costs and, as the economy comes back, there should be at least some improvement in non-interest income so I would regard this as a conservative look through to \"normalised\" post-COVID-19 earnings. The stock is down 25% from its pre-COVID-19 peak, which makes sense opposite the level of bottom line change in this model. Now, if you run a similar exercise on JPMorgan and Wells Fargo, both of which Buffett reduced, you get similar tie-ins with stock price performance.  JPM sees a 24% hit to earnings, and the stock is 24% down. WFC sees a greater than 50% hit to earnings, and the stock is more than 50% down.  So JPM looks very similar to BAC. Why such a serious hit to WFC? There are four reasons:  A greater share of net interest income in the revenue mix, equates to a greater hit from low interest rates on overall revenue and the bottom line. The Fed asset cap preventing asset volume expansion to offset margin pressure. A greater hit to non-interest income due to a smaller trading business. Upward pressure on costs, due to re-engineering expenses and costs associated with the aftermath of its 2016 accounts scandal.  The market looks for BAC and JPM to have recovered, or nearly recovered, 2019 EPS levels by 2022. WFC is expected to still be below the 2019 level, by 9%. The main drag factors in the outlook are the asset cap (the date of removal is guesswork when modelling future earnings) and the tilt toward net interest revenue in the income mix with rates remaining super low for longer.\n  Source: Nasdaq Earnings JPM and BAC look similar in terms of valuation (P/E Ratio). WFC looks very cheap. It offers strong upside if it can meet its peers' P/E ratios by 2022, and don't forget, the whole sector may have improved its valuation by that point if risks have receded.  Source: Nasdaq Earnings Mr. Buffett's first potential mistake here is reducing WFC at such a low valuation. Berkshire Hathaway has ridden WFC down from its days trading at a premium valuation and I think a sale at this point comes near a potential turning point in the shares, and risks selling at the bottom. As I showed in recent articles about WFC, the franchise is solid and extraneous factors like the asset cap and settlement charges are temporary impediments, the alleviation of which will allow it to move forward. Do read the articles to get the full story. The key point is that once these well-understood problems are dealt with, there is no reason for WFC to trade at a valuation discount to the likes of JPM or BAC. The second potential mistake is favoring BAC over JPM Reducing JPM is also a curious move, given that it is on a similar valuation to BAC and is, at the least, a similar quality banking business. For example, in the current environment, JPM holds the advantage of generating a higher percentage of its operating revenue through non-interest-based sources, which have improved further in the first half of 2020.\n  Source: Company quarterly results data While BAC's operating revenue declined 3.3% over the last five quarters, with a boost in trading income only partially offsetting pressure on net interest income, JPM saw a revenue gain of nearly 15% YoY.  Source: Company quarterly results data The valuation of JPM, of course, hasn't gained relative to BAC because trading revenue, though welcome during a period such as this, is hard to predict and therefore doesn't attract a high P/E from the market. That said, it is difficult to see JPM stock as less attractive than BAC, given the similarity in valuation. It's no surprise to see JPM running a better efficiency ratio (operating costs/operating revenue) in 2Q this year due to this boost to trading income. However, in recent prior quarters, it also has a slight advantage over BAC.  Source: Company quarterly results data Overall, then, the JPM sale doesn't make much sense in terms of revenue composition and performance, nor in operating margin and efficiency, again given that investors pay a similar P/E ratio for the two stocks. Capital adequacy: JPM is the winner \n At times of strain in the economy, investors tend to pay a little more attention to capital adequacy in banks. As closely regulated G-SIBS, the banks we are looking at in this article all have strong capital ratios. JPM runs a higher capital buffer than the other two banks given its business composition. If anything, JPM holds the edge over BAC and WFC here.  Source: Company quarterly results data Conclusion JPM and BAC trade at similar valuations, and JPM arguably is more robust in the current environment while being slightly better suited than BAC to a very low rate environment going forward due to its income mix. WFC undoubtedly has more operating challenges than its two peers looked at here, but the stock reflects this in a much lower P/E ratio (2022). This means that WFC offers a great deal more upside than either JPM or BAC should management prove able to tackle the bank's problems. It is difficult to see the market tolerating failure in this respect. At your next lunch with Warren Buffett, take this article with you and ask him why he favors BAC when JPM may be better suited to the current environment and costs the same in terms of P/E, and WFC offers greater upside if management take the necessary remedial actions. If you found this article useful, please consider following me using the button at the top.\nDisclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in WFC over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). 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