It’s no secret that billionaire investor Warren Buffett loves investing in banks. His company Berkshire Hathaway has large positions in many major US banks including Wells Fargo, Bank of America, Bank of New York Mellon, Goldman Sachs and US Bancorp.
Some of these investments were made at a time when the banks were going through a crisis and as such, their share prices were trading at a discount (think Bank of America and Goldman Sachs).
Other investments were made because Buffett was attracted to their high return on equity (ROE) (think Wells Fargo and US Bancorp).
Which brings me to the Commonwealth Bank of Australia (ASX: CBA).
It certainly is a bank in crisis. From the financial advice debacle to life insurance, CBA just cannot stay out of the news for the wrong reasons.
Since its peak in April this year, the CBA share price has plunged 12.90% to $76.35.
Yesterday, CBA was again in the news after analysis from Jonathan Mott of UBS concluded that the fallout from the AUSTRAC allegations may lead to CBA lowering its ROE target by 1%. CBA shares slipped by 0.5% yesterday.
As the market continues to sell off CBA shares, a closer look reveals that its profitability remains attractive relative to its global peers. CBA’s ROE of 16% is higher than US Bancorp (14%), Wells Fargo (12.5%) and Bank of America (8.1%).
In 2015 after investing in Insurance Australia Group Ltd (ASX: IAG), Buffett said, “Banking is something I have looked at. I am comfortable with banks. We have some big positions in US banks. I will certainly be looking at the banks [in Australia]. In looking at banks, I would say there is a good chance that five years from now, we will have bought one or more positions in Australian banks”.
As CBA continues to battle the regulators, consumers continue to struggle with high household debt, and the threat of higher interest rates looms large, I wouldn’t be surprised if we had a visitor from Omaha on our shores in the next 3 years.
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Kevin Gandiya has no position in any of the stocks mentioned.
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The Motley Fool Australia owns shares of Insurance Australia Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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