Is Warren Buffett's Bank of America Sale Cause For Concern?

Yahoo

19-05-2025

Bank of America (NYSE:BAC) has been a long-time holding of Berkshire Hathaway, the conglomerate run by investing ledged Warren Buffet. However, Buffett has been trimming Berkshire's position in Bank of America and continued to do so during the first quarter of 2025. During the first quarter, Berkshire reduced its Bank of America stake by roughly 48.6 million shares, or roughly 7%, to 631.5 million shares.
Berkshire's investment in Bank of America began in 2007 with a common stock investment which was later liquidated at a loss. In 2011, Berkshire made a new preferred stock investment into Bank of America which included warrants to purchase common stock. The warrants were exercised in 2017 resulting in Berkshire purchasing 700 million shares at a price of $7.14 per share. At the time, Bank of America shares were trading at roughly $24 per share. Since then, Bank of America shares have continued to perform well driven solid earnings growth. Overall, the investment has been highly successful for Berkshire. Despite Buffett's recent decision to sell, Bank of America remains one of Berkshire's largest holdings accounting for just over 10% of its public equity portfolio.
While it is difficult to know why Buffett decided to reduce his Bank of America position, and he did not comment on the sales during Berkshire's annual meeting, he had reduced his position over the past few quarters and thus the continued reduction does not come as a total surprise. One potential reason why Buffett has reduced his Bank of America position is that it had grown to become too large a percentage of Berkshire's total equity portfolio. By mid 2024, the time that Buffett started reducing the position, Bank of America had grown to become Berkshire's second largest holding at nearly 15% of its portfolio, behind only Apple. Buffett started reducing his Apple position around the same time and held that position steady in the most recent quarter following multiple quarters of reductions.
Another potential reason why Buffett may have decided to reduce Berkshire's Bank of America stake could be that he believes the moat around the business has weakened. I view this as unlikely given the fact that the company has continued to report solid earnings and the moat has not showed any signs of cracking. Notably, Bank of America continues to maintain its number two position in share of U.S. total deposits and continues to maintain fairly strong net investment income yield spread of roughly 2%. Further evidence of the continued strength of the business and existence of a wide moat can be seen in the fact that Bank of America continues to enjoy very high net profit margins of nearly 27%.
Buffett may have also come to the conclusion that Bank of America shares are now less attractive than was previously the case based on valuations. While the stock's current valuation of roughly 1.2x book value and 12x earnings per share are not particularly cheap relative to the stock's historical norms they are not towards the highest levels that the stock has traded at over the past few years. In early 2022, the stock traded as high as 1.6x book value.
Bank of America shares currently trade roughly 12x consensus FY 2025 earnings per share estimates and roughly 1.2x book value. The stock also offers a 2.3% dividend yield. Comparably, the S&P 500 currently trades at roughly 22x forward earnings and has a dividend yield of 1.3%. Thus, on a relative basis Bank of America is trading at a substantial discount to the broader market. Despite this substantial valuation discount, Bank of America has near-term earnings growth prospects which are inline or better than the broader market. Consensus estimates currently call for Bank of America to grow FY 2025 2027 earnings per share by 13.1%, 15.6%, and 11.2% respectively.
In addition to trading at an attractive valuation relative to the broader market, Bank of America also appears to be trading at an attractive valuation relative to peers. Wells Fargo trades at 13.5x consensus FY 2025 earnings per share and at 1.53x book value. J.P. Morgan trades at 14.6x consensus FY 2025 earnings per share and at 2.2x book value. In my view the discount compared to J.P. Morgan is not warranted as consensus estimates call for J.P. Morgan to deliver FY 2025 2027 earnings per share growth of 1%, 5.5%, and 7.8% respectively which is well below Bank of America's expected earnings per share growth rates over this period.
Finally, Bank of America's valuation stands out as reasonable relative to historical norms. Over the past 10 years, the stock has traded at a median price to earnings ratio of 12.7x. While the stock's current valuation is roughly inline with this level, the broader market is trading towards the higher end of its historical valuation range. Thus, Bank of America stands out due to the fact that it is not trading at a substantial valuation premium relative to its own historical norms at a time in which the broader market is expensive relative to historical norms.
A key potential upside catalyst for Bank of America shares in the near-term is regulatory reform. The Trump Administration has indicated that it intends to relax regulations in hopes to spurring growth. Mega cap banks such as Bank of America have become heavily regulated in recent years which has restricted their ability to grow and limited the amount of capital which can be returned to shareholders. In particular, moves to relax regulatory capital constraints, especially the supplemental leverage ratio, could allow Bank of America to increase the value of its loan book and return additional capital to shareholders via larger dividends and share repurchases.
Perhaps the biggest risk to the Bank of America bull case is that the Fed cuts interest rates more aggressively than markets expect and medium-term interest rates fall from current levels. On the Q1 2025 earnings call, Bank of America CFO Alastair Borthwick noted that net interest income would fall by an estimated $2.2 billion over the next twelve months if interest rates decline by 100bps more than the four rate cuts which were priced in previously. While the macroeconomic picture remains highly uncertain, I do not expect a significantly more dovish Fed than markets currently expect. Moreover, the continued high levels of the U.S. budget deficit spending lead me to believe that interest rates are likely to say higher for longer than most market participants expect.
Warren Buffett (Trades, Portfolio) has reduced Berkshire's position in Bank of America shares after solid performance of the stock resulted in Bank of America making up nearly 15% of Berkshire's equity portfolio. While it is difficult to know why Buffett has been selling, I do not view his decision to sell as cause for concern as the fundamentals remain strong.
Bank of America shares trade at an attractive valuation relative to the broader market and peers. Regulatory reform represents a key near-term catalyst which could lead to multiple expansion for the stock. An aggressive Fed rate cut cycle would represent a potential negative for the stock but this appears unlikely following President Trump's recent pivot on tariffs. For these reasons, I view Bank of America as an attractive investment despite Buffett's decision to reduce exposure to the stock.
This article first appeared on GuruFocus.