Warren Buffett sold a massive chunk of his bank stocks ahead of what could become a huge credit crunch post-pandemic.
Legendary investor Warren Buffett offloaded billions of dollars worth of bank stocks, opting instead for gold. The colossal sale underscored concerns about the banking sector as bank shares continue to underperform.
Buffett didn’t comment specifically on the motives behind his trades, but the message is clear. There’s a reckoning coming for the financial sector as America’s credit crisis clashes with the economic impact of Covid-19.
Buffett’s firm Berkshire Hathaway (NYSE:BRK.A) offloaded more than $6 billion worth of Wells Fargo (NYSE:WFC) and JPMorgan Chase (NYSE:JPM) stock during the second quarter.
On top of that, Berkshire rid itself of its entire Goldman Sachs (NYSE:GS) position, a trade worth roughly $300 million. Buffett didn’t stop there: his firm also offloaded shares of M&T Bank (NYSE:MTB), PNC Financial Services Group (NYSE:PNC), and Bank of New York Mellon (NYSE:BK).
While Buffett has been slowly adding to his position in Bank of America (NYSE:BAC), the fact that he’s exiting bank shares has been enough to raise eyebrows on Wall Street.
Since Covid-19 ground the economy to a halt back in March, investors have been questioning whether banks will be able to survive against the pandemic’s headwinds. Many have been comforted by the fact that banks are far better capitalized than they were back in 2008—so we aren’t on the brink of financial collapse as we were back then.
That doesn’t mean banks are in the clear, either. Bob Diamond, former Chief Executive of Barclays, says he’s worried about the sector. He should know—he was in charge of the U.K. bank during the financial crisis.
Diamond warned that, while banks aren’t in as weak a position as they were back then, profitability is a concern. He doesn’t see trading volumes continuing in the back half of the year, which could sting banks that have been using the trading boost to pad their finances.
The banks are well capitalized and fundamentally safe. The greater issue is profitability. The volatility that drove trading revenues in 1H 2020 cannot be relied upon to continue.
Even the Federal Reserve has issued cautionary statements about the nation’s banks. During its semiannual review, the Fed warned that bank profitability would be a concern as long as the economy remains on life-support.
[R]ecent declines in interest rates and the potential for rising credit losses have weakened the outlook for bank profitability, a key factor in banks’ ability to replenish capital
The Fed went on to note that the financial strains that households experienced in March are likely to “create fragilities that last for some time.”
That was back in May, but since then, things have only gotten more uncertain. It’s still unclear exactly how the pandemic has impacted employment and income.
Not to mention, Congress’ failure to agree on a new stimulus package has left many struggling households empty-handed. New, lower unemployment benefits probably won’t be enough to plug the hole.
U.S. banks have already set aside a whopping $76 billion to cover bad debts while their European counterparts have a €56 billion war chest. During the financial crisis, loan-loss provisions rose to $186 billion. Consultants at Accenture expect banks to suffer losses of $880 billion by the end of 2022.
With that in mind, it’s easy to understand why Warren Buffett might be pulling out of the financial sector. He has been unquestionably cautious throughout the coronavirus crisis, and although that’s drawn criticism, it could be worth emulating now that the stock market is near record highs.
Banks have largely missed out on the stock market’s rally, prompting some to scoop up shares as long-term value plays. But as Bill Coen, the former head of the Basel Committee of international banking regulators cautioned, the worst isn’t over yet:
We are now approaching the second wave of stress, a tidal wave of credit issues, so it’s far too early to claim victory yet.
Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com and should not be considered investment or trading advice from CCN.com. The author holds no investment position in the above-mentioned securities.
Last modified: September 23, 2020 2:24 PM