Buffett's new bank

A tremendous amount of due diligence goes in to evaluating a financial institution

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

When it comes to Warren Buffett and banks, we're used to hearing about the unbeatable Wells Fargo. But Buffett has tripled his position in another banking stock — suggesting that there's more than one mega-bank worth a look. This one has low credit risk, a lot of cash, and plenty of room for international expansion. Get out your chequebooks, bank lovers.

Tough sector
Investing in banks ain't easy. That's just the truth. They aren't manufacturing companies that we can forecast out 10 years from now with predictable revenue models. Banks are convoluted, multi-faceted organisations that should only be in your portfolio if you are knowledgeable in the banking industry, or have it on good, and I mean real good, authority. For the latter, you can look to occasionally-mentioned super investor Warren Buffett.

Shortly after the financial crisis, Buffett's Berkshire Hathaway (NYSE: BRK-A, BRK-B) took positions in a couple of the super banks. His investment in Bank of America was more of a necessity for the beat-up bank, but Buffett also ramped up his position in Wells Fargo (NYSE: WFC), which is now widely considered to be the top bank around. Wells Fargo, in addition to being more conservative than its whale-employing competitors, like JP Morgan (NYSE: JPM) and Citigroup, holds an enormous amount of home mortgages on its books, ready for the coming housing rebound (that many believe has already begun). The Wells Fargo investment has already paid off handsomely for Buffett and Berkshire, but there is another bank that still has room to pop, and Buffett is making sure his company will benefit.

What a melon
In Berkshire's latest 13-F, we see that Buffett has tripled his position in Bank of New York Mellon (NYSE: BK). BNY fits Buffett's bank investment style because of its conservative practices, cash-printing tendencies, and sound management. The company has many appealing factors for those who find bank stocks cheap, and want exposure while maintaining a conservative approach.

BNY doesn't make the bulk of its money from fly-by-night traders and morally bankrupt I-banking practices. Three quarters of the company's revenue comes from recurring servicing fees, which is an ideal situation for a bank, or any company. BNY is the custodian of over US$27 trillion globally, and has over US$1 trillion directly under management. I don't think I need to point out that servicing fees for US$27 trillion is a hefty chuck of recurring change.

'merica
Another interesting part about BNY is that more than 60% of its business still takes place in the United States. The company has an expanding global presence, and is eyeing more and more of its future revenue to be sourced from other regions of the world. This presents BNY with a unique opportunity to grow very quickly in its untapped markets around the world. It's a rare case of a value-looking stock with strong growth potential.

And, speaking of value, BNY trades…well, like most bank stocks trade these days. An investor in BNY is currently paying 0.78 times book value – basically, like going to an estate sale. At less than 10 times forward earnings, it is priced only slightly higher than JP Morgan and Citigroup, and carries considerably less risk.

With interest rates absurdly low and seemingly staying that way for the foreseeable future, it makes sense to look at a financial stock that isn't heavily reliant on those rates. By focusing its attention on servicing customer's investments, BNY has drastically reduced its interest rate and credit risk, offering investors as close to a long-term forecast for revenues as possible in the banking industry.

Bank buffet
Like I said, banks are not easy to invest in. There is a tremendous amount of due diligence that needs to go in to evaluating a financial institution, with the exception of local S&Ls. Following Buffett's lead on this stock is a great move, given the transparency of BNY's revenue streams and the conservative nature of its business.

If you're in the market for some high yielding ASX shares, look no further than our "Secure Your Future with 3 Rock-Solid Dividend Stocks" report. In this free report, we've put together our best ideas for investors who are looking for solid companies with high dividends and good growth potential. Click here now to find out the names of our three favourite income ideas. But hurry – the report is free for only a limited time.

 More reading

The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

A version of this article, written by Michael Lewis, originally appeared on fool.com

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »