In 2011, Berkshire Hathaway bought $5B of preferred shares of Bank of America that carried a 6% yield. In addition, Berkshire received warrants giving them the right to buy 700 million common shares at $7.14 per share ($5B). Berkshire had the option of converting the preferred shares into 700 million common shares rather than paying cash, which is ultimately what they did in Q3 of 2017. This was the quarter at which the annual dividend from the 700 million common shares rose above the $300 million that Berkshire was collecting from the preferred shares.
At the point of conversion, Bank of America was trading around $25 per share, so in six years Berkshire had made approximately $14 billion on its original $5 billion investment (between preferred dividends and appreciation of the common share price). Berkshire has since upped its stake from 700M shares to a little over a billion shares today, spending $6.6B in 2018, $0.9B in 2019, and $2.1B in 2020. The 2018 and 2019 purchases were done around $30-31 per share, while the 2020 purchases were done around $24 per share. With Bank of America trading around $32 as of 6/24/2022, the bulk of Berkshire’s return thus far has come from the initial 2011 preferred + warrants deal. Below I have approximated the IRR and MOIC of the investment:
The 2020 purchases are interesting, considering at the same time Berkshire was liquidating many of its other large bank positions (Wells Fargo, JPMorgan, and Goldman Sachs). My best guess for this move is two-fold:
Brian Moynihan - When Moynihan became CEO in 2010, BofA was a mess, especially in the eyes of regulators. According to this NY times article written by Lananh Nguyen, they had to pay $76.1B in fines during the years following the 2008 financial crisis. Today, BofA is a well-respected bank that earns a mid-teens return on tangible equity. The quarterly dividend has gone from 1¢ to 22¢; shares outstanding has declined from 10.3B at the beginning of 2016 to around 8B today. The turnaround is due in large part to Moynihan’s leadership.
Asset sensitivity - BofA and Wells Fargo are more asset-sensitive than their peers, meaning assets reprice quicker than liabilities and thus rising interest rates quickly increase net interest income (“NII”). In Table 46 of its most recently filed 10-K, BofA shows how a 100bp increase in interest rates affects NII. If both short- and long-term yields rise 100bps, NII would increase $6.5B. Perhaps concentrating in BofA over other banks was a bet on higher interest rates.
Currently, BofA is Buffett’s favorite large bank. However, things change quickly in banking (as mentioned earlier, BofA was a mess pre-Moynihan). For about 25 years, Wells Fargo was Buffett’s favorite, and as recently as 2015 it (and its CEO John Stumpf) had an excellent reputation. Following its fake account scandal, it is now probably the most hated bank in the United States, and Berkshire Hathaway owns zero shares. Hopefully, Bank of America will continue to execute and reward shareholders during and long after Moynihan’s tenure. As Buffett says, “banking is a very good business, unless you do dumb things.”