Warren Buffett (Trades, Portfolio) is continuing to make a significant contribution to US banks. In an article published in October, I discussed five reasons why I believe it is investing in the financial sector. A quick view of their positions shows that Buffett is also in favor of the industry entering 2020.
Source: Filing 13-F
The American Bank Corp (NYSE: BAC) is the second largest holding of the Guru and is also the largest financial company owned by Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B). He was a star performer in 2019.
Even at the back of last year's 43% gains and the declining interest rate environment, shares appear to be an attractive investment for shares at all times.
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Ongoing analyzes of estimates for earnings per share were at the heart of the bank's significant performance in 2019. It is expected that it will report earnings of quarter quarter 2019 on 15 January, and these numbers are likely to cause the American Bank's performance. this year .
Source: Filing company.
According to Priti Dhanuka, an analyst at Zacks covering the financial sector, Bank of Ireland is likely to present another surprise earnings this Wednesday. While the Federal Reserve decided to reduce rates by three times in 2019, Dhanuka believes that the slow growing but steady US economy is offsetting the negative impact of declining policy rates by enabling the bank to attract new customers. win and attract deposits and a foreign portfolio growth.
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According to third quarter filing, the American Bank Level 1 equity ratio was 9.7, but the minimum requirement under the Basel III condition is 4.5. The bank has been careful to maintain high Tier 1 capital as this also helps to approve its repurchase programs.
Data from the Federal Deposit Insurance Corp showed that the American Bank has the highest share of the market among deposit takers in the US in the 12 months ending 30 June. Medium deposits also increased on a year-on-year basis in the third quarter of 2019, despite the large amount of the bank.
Source: Presentation of investors in the third quarter.
Management in the third quarter earnings call stated that deposit growth at the American Bank has always been higher than the industry average for many years, which is likely to continue in the future.
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In general, interest rate cuts for banks are considered to be barriers as net interest margins tend to be in such an environment. However, as evidenced by the chart below, American Bank net interest margins are compressed with a negligible amount, resulting in higher earnings based on growth of its loan portfolio.
Source: Third quarter earnings presentation.
The performance of the third quarter of American Bank and other major banks has helped to alleviate investor nerves. Most banks grew their portfolio of loans and deposits. According to the Financial Times, the demand for loans was also strong. In summary, the industry can survive if rates are not further reduced, the likely outcome in 2020 as confirmed by the Chairman of Resident Jerome Powell in December.
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The American Bank likes to give its shareholders extra income, which is clear from its recent distribution. According to data from Reuters, the bank has achieved its dividend in all of the last six years, which is proof of its commitment to providing revenue to investors. At a market price of about $ 34.74 Monday, received 2.07% of the shares.
The share repurchase program is also attractive. In July, the bank authorized a new plan of $ 31 billion to be distributed among investors through purchases by July 2020. Although this is not a liability, management is likely to decide to go through this plan according to as the American Bank remains adequately funded and very profitable.
Chief Executive Brian Moynihan said this was about returning capital to shareholders in an interview with Barron: t
"We buy lots of stock and invest in our people and our business. We don't need to grow capital. We can't make acquisitions from themselves and a few other banks. Nothing, what should we do with the money?"
It is likely that the Bank of America will continue to award prizes to investors for a long period through purchases and dividends, which provide a positive signal to revenue investors. The inability to attract attractive growth opportunities is not an alternative to the distribution of wealth to shareholders.
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It is a rare occurrence when many analysts agree on a large cap company. In this case, however, the Street agrees, and many major investment banks have a "buy" rating for American Bank shares.
Here are two of the significant comments made by analysts who follow the bank.
Write Jason Goldberg Barclays:
"The significant improvements BofA has made in its consumer bank, as well as the benefits of recent technology investments, are not fully appreciated by investors. Our target is $ 43."
Mike Mayo Wells Fargo also has a positive stock view:
"The American Bank is delivering a national banking commitment. With its investment in technology, it is creating a sustainable competitive advantage. In banking, Goliath is winning, and Goliath is the best of Bank of America." next year and $ 50 for the next three years. "
The average consensus estimate for American Bank shares is $ 37.31, which is 7.3% higher than the market price of approximately $ 34.77 as from Monday.
The shares are currently trading on a multiple of pre-price earnings of 12.87. This is much lower than the S&P 500 Index, which is currently trading multiple of 24.57 according to Reuters data. Higher earnings than expected in the future will help shares that come together with the multiple market market, and as a result of partial convergence there will be a healthy capital value.
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There is no better way to determine the quality of the management team rather than to assess a company's financial performance over a long period of time.
Investors don't need to go beyond the shareholders letter sent by Warren Buffett (Trades, Portfolio) on February 25, 2012, and said he would have confidence in the leadership of Moynhagh after the 2008 financial crisis.
"At the American Bank, management made a number of major mistakes. Brian Moynihan has made great progress in cleaning things, although it will take a number of years to complete this process. future warrants to purchase 700 million American Bank shares before they expire. "
This is the trust that “Oracle of Omaha” in the Chief Executive has almost eight years ago. As always, it was proved that it was correct in its decision to invest in the shares of the bank. Buffett recently said that Moynihan is one of the lowest value bank executives at present and that his skills are not being praised as much as they are.
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Last October, Berkshire Hathaway sought permission to increase its involvement in the American Bank to more than 10%, that is the maximum allowed under the current regulations. In filing signed by Buffett, the following explanation was given to the public:
"Berkshire may decide to purchase additional shares of a common stock of Bank of America based on its evaluation of the investment opportunity presented by such purchases."
There are many things to love about this bank, including the attractive dividends and back purchases, that shares are trading at an attractive valuation point and the high quality management behind the growth story. Economic recession is unlikely to occur for at least the next three years according to the World Bank and the International Monetary Fund. This gives the belief that the US banking sector is all for a long period of time for many years to come as a strong economy helps these institutions, and the American Bank is likely to be in charge, as it did with past five years. t
Disclosure: I do not own any stocks mentioned in this section.
Read more here: t
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