On banking business



Banking, if you can just stay away from following the fads and making bad loans, has been a remarkably good business. Since WW II, ROE for banks that have stayed out of trouble has been good. Some large well-run banks earn 20% ROE. I’ve been surprised that margins in banking haven’t been competed away.

[CM: What you’re saying is that we screwed up, because banking has turned out to be better than we thought. We made a few billion [dollars] from Amex while we misappraised it. My only prediction is that we will continue to make mistakes like that.]


It’s pretty extraordinary that institutions competing against each other without real competitive advantages can all make high returns. Part of it is higher loan to value ratios than in past years. Some banks get into trouble making bad loans, but you don’t have to.

Source: 2003 Berkshire Hathaway Annual Shareholder Meeting


Competitive advantage and business model in banking:

– Banking is a good business – many banks earn high returns on tangible equity

– “Charlie and I have been surprised at how much profitability banks have, given that it seems like a commodity business.”

– Underestimated how sticky customers are and how unaware they are of fees banks charge them

– WFC – $4.00 per share after full taxes on $15 of tangible equity

– If you have a well run bank, you don’t need to be the #1 bank in an area

– Bank ROA is not highly correlated to size

– You may have to pay 3x tangible equity to buy a bank

– Only problem with banks is that sometimes they get crazy and do dumb things…’91 was a good example

– If a bank doesn’t do dumb things on the asset side, it will make good money

Source: Meeting with Warren Buffett, Jan 28 ,2005


Question: Small regional banks – what would you look at before you buy?

Buffett: It is hard to make a categorical decision about regional banks. So much depends on the character of the institution. It will be a reflection of the CEO you have. A bank can mean anything. It can be an institution that is doing all sorts of crazy things. The Bank of Commonwealth was an example. We owned a bank in Rockford, Illinois, run by Dean Aback—he would always run a super, sound bank. You should know the culture of the management and the institution before making the decision to buy a bank. We own Wells Fargo and M&T, but it doesn’t mean they are immune. But likely they are immune from institutional stupidity. There was a wise man that said there are more banks than bankers. If you think about that a while, you will get my point.

Munger: The questioner is on to something. So many large banks have cast a pall over the entire industry. You are prospecting in a likely territory.

Buffet: If you took the 20 largest and the 20 smallest banks in Florida, I don’t know if you could tell the difference.

CM: It is a territory that has some promise.

WB: That is a wildly bullish statement from Charlie. I may need to go start buying! [laughter]

Source: 2008 Berkshire Hathaway Annual Shareholder Meeting