Investing Wisely in Buffett's Portfolio: Weighing Between Citigroup and Bank of America
Warren Buffett and his Berkshire Hathaway team have historically had an affinity for the banking sector, boasting ownership of major Wall Street banks throughout the years. Despite a potential shift in sentiment post-pandemic, Berkshire's portfolio still houses bank stocks like Bank of America and Citigroup. Let's explore these two investments and figure out which could be a better buy.
Bank of America: Challenging the Titan, JPMorgan Chase
Bank of America has been a staple in Berkshire's portfolio for a long time, accounting for 12% of the overall portfolio, making it the second-largest position. Buffett sold a considerable chunk of it last year, but it's unclear if this trend will continue.
Bank of America often gets likened to JPMorgan Chase's little brother, as it's the second-largest bank by assets in the US. Both institutions excel in various banking segments, including commercial lending, investment banking, wealth management, and credit card lending. It's just that JPMorgan's returns are generally higher. Bank of America reported a 13.2% return on tangible common equity (ROTCE) over the past two years, while JPMorgan's ROTCE averaged at 21.5%.
While Bank of America may not get close to JPMorgan's returns, it can surely do better than 13.2%. Bank of America is known for its 'stickiest' consumer deposit base among the Big Four US banks. This characteristic positively impacts the bank when there's a yield curve steepening, a situation we're currently experiencing. During its last earnings call, management predicted the bank's quarterly net interest income to possibly grow by $1 billion in 2023, outpacing initial analyst estimates. Also, loan growth could resume in 2023.
Bank of America might not excite investors like Wells Fargo's exit from its asset cap does, but it stands to gain from regulatory relaxation and uptick in investment banking activity.
Citigroup: It's a Different Time
Berkshire stepped into Citigroup stocks in 2022, now making up a 1.5% share of the portfolio. Citigroup has had a difficult time post-Great Recession, with investors growing weary of the stock due to the lackluster performance.
However, things seem to be changing. New CEO Jane Fraser has been working towards simplifying Citigroup's organization and exiting or selling underperforming international franchises. The bank is also modernizing its infrastructure, fixing internal control issues, and divesting from Banamex, its Mexican division. Although the sell-off progress has been slow, it remains on track to streamline operations and generate additional capital for growth.
Citigroup reported solid Q4 earnings, prompting a share repurchase plan worth $20 billion. This move is highly anticipated among investors and demonstrates a undervalued status, trading below its tangible book value (TBV). Buying stocks when they are lower than TBV is a smart move as it improves TBV, eventually leading to a higher share price.
In summary, both Bank of America and Citigroup present promising investment opportunities. While Bank of America offers a steady performer's portfolio, Citigroup stands out with its undervalued status, growing earnings, and restructuring efforts led by CEO Jane Fraser. If Citigroup can achieve better returns over time, investors will definitely reap the rewards.
In the realm of finance and investing, Buffett and Berkshire Hathaway's interest in Bank of America extends beyond just bank stocks, with a significant 12% allocation to the institution in their portfolio. This long-term investment has aided Bank of America's growth, as demonstrated by its 'stickiest' consumer deposit base and anticipated quarterly net interest income increase.
Furthermore, Berkshire's recent acquisition of Citigroup stocks signifies faith in the bank's transformation under CEO Jane Fraser. Citigroup's restructuring efforts, including selling underperforming international franchises and modernizing its infrastructure, are auspicious signs of the bank's potential growth and undervalued status, as indicated by its trading below tangible book value.
