What’s Buffett’s Next Big Bank Play?

When most people think of Warren Buffett and bank stocks, they usually think about the ever-expanding Wells Fargo and Company. But if you happen to take a look at the last 13 – F, you’ll see that Warren Buffett decided to triple his overall position in another bank stock. This actually suggests to me that there’s more than one mega-bank worth looking at right now. This particular bank is a low credit risk, and also has a lot of cash on hand, and there is a lot of room for it to expand internationally. So get those checkbooks out right now, bank stock buyers.

Difficult sector

It is not easy to invest in banks at the moment. I know you don’t want to hear this, but it really is the truth. It’s not like investing in a manufacturing company where you can predict what will happen during the next 10 years because it’s an easy to figure out revenue model. Banks are large, multifaceted and convoluted organizations. You should really only have them in your portfolio if you truly understand the ins and outs of the banking business. Otherwise, if you own them, you should have it on incredible authority that they are poised to make a consistent profit. That’s why a lot of people tend to often look to Warren Buffett and his investments as a good authority.

Not long after the financial crisis began, Berkshire Hathaway and Warren Buffett took out a few positions in some of the largest banks. One position they took out was in Bank of America, but this was more of a necessity to help out the ailing bank.

Warren Buffett also raised his position in Wells Fargo at this time, and is currently considered the best bank around right now. Wells Fargo is known to be a lot more conservative than its fellow competitors, such as J.P. Morgan Chase and Citigroup, and it has quite a bit of home mortgages currently on its books, which is excellent for the rebound in the housing market that is about to take place.

As a matter of fact, it looks like the housing market rebound has already begun at this point in time. It’s no secret that Warren Buffett’s Wells Fargo investment has already paid off big time for Berkshire Hathaway and the Oracle of Omaha. But there’s still one more bank that has quite a bit of room to go up in value in the foreseeable future, and Buffett is ready and waiting for his company to benefit when it does. Will you be waiting with him?

What a melon

As we review the latest 13 – F from Berkshire Hathaway, you will notice that Warren Buffett basically tripled his position in Bank of New York Mellon at this time. Bank of New York Mellon perfectly fits the investing style of Warren Buffett since it is a very conservative company, it has tendencies for cash printing, and the management in this business is very sound. There are a lot of appealing factors if you happen to be somebody looking for a cheap bank stock to purchase, and you are looking for exposure in the banking industry while keeping a very conservative approach.

The good thing for you conservative investors out there is that BNY is not one of these banks that make its money from banking practices that are morally wrong, as well as fly-by-night trades. About 75% of the revenue of this company comes from servicing fees that are recurring, and this is an excellent model which is obviously a perfect revenue model for a bank, or any company for that matter. BNY is actually the custodian of more than $27 trillion on a global level, and they are directly managing $1 trillion at the current time. I obviously do not need to point out that the servicing fees on $27 trillion are clearly going to be a really large chunk of change that is a fantastic recurring fee for Bank of New York Mellon.

The good old US of A

Another excellent thing that you might want to know about Bank of New York Mellon is that over 60% of their business takes place in the United States of America. But the company has a global presence that is expanding, and it is currently looking to earn more future revenue from other sections of the world as it expands. This is a really good opportunity for BNY because it has the ability to grow its business very fast since there are many different untapped markets all around the world just waiting for them. This is one of those rare cases of a stock that looks good for value investors, but the growth potential is also very strong as well.

Let’s stay on the topic of value for one second longer, because BNY trades pretty much like all of the other bank stocks are trading these days. As an investor in BNY, you only have to pay 0.78 times book value, which in my estimation is practically a fire sale. This is much less than 10 times its forward earnings, so it is only a little bit higher than Citigroup and J.P. Morgan as we speak, but the risk in this stock is considerably less than both of those mega-banks.

Since interest rates are increasingly low and basically staying there for the unforeseeable future, it obviously makes a great deal of sense to look into stocks that aren’t relying on the low interest rate to make its money. You want to look at banks that are focused on servicing the investments of its customer, which is exactly what BNY does. And they have drastically reduced their credit risk and interest rate, so they are able to offer their investors a really great business model of long-term revenue which is tough to pull off in the banking industry.

I want to remind you that it is not always really easy to invest in banks. You have to do a great deal of due diligence when evaluating a financial institution like this, and the only exception is with the local savings and loans. If you follow Warren Buffett’s lead by purchasing the stock because you feel it is an excellent choice, then you’d be in good hands since Bank of New York Mellon is very transparent with their current revenue streams, and they are also a exceedingly conservative business by nature. It obviously makes sense to follow the best in the world, and that is the exact opportunity that you have if you decide to follow Warren Buffett down this path.

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