Buffett buys more bank shares: Should you?

Despite the economic uncertainty, CNBC reported this week that Warren Buffett has hiked his stake in a United States bank by US$800 million. Does this mean it’s time to purchase ASX bank shares?

What did Buffet buy?

According to a Securities and Exchange Commission filing, Berkshire Hathaway bought 33.9 million shares in Bank of America worth US$813.3 million. As a result, this lifted his stake to more than US$24 billion. The transaction was flagged as it resulted in an ownership interest amounting to over 10%.

This triggered a rally in Bank of America shares of 1% despite the fall in the US markets overnight. However, the Bank of America share price has slumped this year.

In a Berkshire Hathaway virtual AGM held in May, Warren Buffett was optimistic about the future and it appears he is confident in the future of his investment in Bank of America as well. 

Additionally, through Berkshire Hathaway, Warren Buffett has stakes in multiple other banks including Goldman Sachs and JPMorgan Chase & Co.

Should you buy ASX banks?

Similar to banks in the US, Aussie bank shares have been hit hard by recent events. National Australia Bank Ltd (ASX: NAB), Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group Ltd (ASX: ANZ) share prices are down 36.5%, 11.5%, 37.4% and 34.0% respectively in the past year.

On Wednesday this week, APRA chair, Wayne Byres, gave a speech stating that “our banks and insurers remain soundly capitalised and highly liquid. APRA’s stress testing of the banking sector indicates the industry is well-placed to withstand economic headwinds ahead: even when faced with severe adverse scenarios, our analysis indicates the banking industry would remain well above minimum capital requirements”.

Recent data from Roy Morgan also pointed to an increased satisfaction in Australian banks in May at 79.5%. This is up 1.1% compared to a year ago. However, this still trails mutual and foreign banks with satisfaction ratings of 89.2% and 85.5% respectively. 

An S&P report, as reported by Business Insider Australia, comments that Australian Banks are unlikely to see a return to their pre-COVID-era earnings.

S&P’s Sharad Jain said “For most banks, a steep rise in credit losses, and a sizeable drop in interest margins and fee income, will likely suppress earnings at least for the next year”. He also went on to say that “We forecast significant property price drops in Australia…”

Australian banks are particularly vulnerable to property price drops and have significantly increased provisions for losses.

My take

Australian economic conditions characterised by recession, low interest rates and high unemployment could point to a continued decline in ASX bank share prices. This is due to their being highly leveraged to the performance of the economy.

However, an investment in bank share prices presently could be rewarding over the long run as the economy recovers over a number of years. Additionally, Warren Buffett is known for investing in companies when other investors are fearful. Food for thought…