Warren Buffett's Berkshire Hathaway has recently revealed some major share sales. Interestingly, among the sell-offs were notable sales of bank stocks. So could this suggest that Aussie investors should consider the situation for ASX bank shares?
First, let's take a look at what moves Berkshire Hathaway has made.
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Berkshire Hathaway sells out of two bank stocks
The giant US business has grown enormously over the last five decades, thanks to the stewardship of Warren Buffett and his partner Charlie Munger.
While Buffett makes a lot of the stock portfolio changes, there are also two other investors who manage their own portfolios within the business. So not every investment decision will be Buffett's, but it's likely these large bank stock decisions came from him.
Berkshire Hathaway sold out of its long-term holdings of Bank of New York Mellon and US Bancorp. This comes after the banking problems with names like Silicon Valley Bank and First Republic Bank.
However, Berkshire Hathaway didn't completely sell out of the financial sector. In fact, Buffett's business added to its position in Bank of America shares to the tune of around 22.75 million shares, while also buying 9.9 million Capital One Financial shares.
I think the Bank of America investment shows Buffett hasn't lost complete confidence in the US bank stock sector, but he's being more selective about which banks to be invested in. Credit card business Capital One could be more well-equipped to deal with the current economic climate. For one, it doesn't have a huge deposit base which could be a problem if there were massive withdrawals, and it can benefit from higher interest rates.
What to make of this for ASX bank shares?
The situation is tricky in the US for smaller banks. If most depositors of a financial institution tried to withdraw their money in quick succession, it can cause major problems for that bank.
The biggest US banks actually saw deposit inflows during that uncertainty a couple of months ago.
If there were to be concerns over an Australian bank, I think we would see a similar outcome. Depositors might seek the safety of the biggest institutions, with money flowing out of the smaller banks.
However, I think that Australian banks are in a strong financial position when it comes to their balance sheets. The Australian Prudential Regulation Authority (APRA) has set high minimum requirements for banks with their common equity tier 1 (CET1) ratios.
Australian banks seem to be in a stronger financial position than many of their peers in the US, so I'm not worried about that side of things.
However, it could be a good time to consider an investor's weighting to ASX bank shares. All the banks face similar risks – Commonwealth Bank of Australia (ASX: CBA), Australia and New Zealand Banking Group Ltd (ASX: ANZ), and Bank of Queensland Ltd (ASX: BOQ) could all be hurt if there's a material rise in loan arrears and bad debts.
Of course, interest rates are now a lot higher than they were a year ago, which could spell trouble for heavily indebted businesses and households.
I think there are some higher-quality bank stock names, such as National Australia Bank Ltd (ASX: NAB) and Macquarie Group Ltd (ASX: MQG), which have conservative operating settings, strong balance sheets, and very effective leadership. They'd be my top two choices in the sector.
But if I had three or more banks in my portfolio, I'd certainly want to consider if owning multiple names in the same industry is providing me with enough diversification.
