7 Bank Stocks to Own for the Long Haul
Warren Buffett loves bank stocks.
At the end of the second quarter, Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) owned six different bank stocks with more than $71 billion invested in those financial institutions.
That’s 36% of the holding company’s entire equity portfolio.
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Why does he like bank stocks?
A big reason is the dividends they throw off each year, which is ironic given Buffett doesn’t pay dividends to his shareholders, and probably never will.
Estimates put the amount of dividends Berkshire Hathaway will receive from his bank holdings, including the company’s investment in American Express (NYSE:AXP), at approximately $1.7 billion … a massive sum by any standard.
The three banks stocks Berkshire Hathaway benefits most: Wells Fargo (NYSE:WFC) at $800 million, Bank of America (NYSE:BAC) at $400 million and AXP at $230 million.
Interestingly, that’s about the same as the interest Berkshire Hathaway’s insurance division pays, its biggest by revenue and profits, in annual interest on its debt.
As long as these bank stocks keep paying dividends, Buffett’s golden goose won’t have a problem continuing to lay its golden eggs.
If bank stocks are good investments for the Oracle of Omaha, it reasons they should be okay for the regular investor, too.
Here are seven bank stocks to own for the long haul — one from seven different states.
Silicon Valley Bank (SIVB)
Source: Shutterstock
Based in Santa Clara, California, right in the heart of Silicon Valley, Silicon Valley Bank is part of SVB Financial (NASDAQ:SIVB), a financial holding company like very few others.
Back in 2013, I called SIVB one of the five-best stocks to buy for the next 20 years. Five years in, I’m glad I did because it continues to deliver for shareholders, up to 30% on an annualized basis over those five years.
“There is no regional bank better positioned to take advantage of the entrepreneurial spirit appearing to take root in countries like China, India and Israel,” I wrote at the time. “I know it’s hard to pick stocks that are going to do well in three years, let alone 20, but I see SIVB becoming a large-cap by 2020.”
Currently, its market cap is $16.9 billion, so depending on your definition, it’s either a large mid-cap or a small, large cap.
Either way, it’s my pick for the best bank stock to own in California.
Regions Bank (RF)
Source: Shutterstock
Named one one of the 30 Best Banks of 2018 by GOBankingRates, Birmingham-based Regions Financial (NYSE:RF) is a Fortune 500 company. RF has $95 billion in total deposits, making it the 16th-largest in America, and it has an $80 billion loan portfolio split nicely between consumer loans (39%) and business loans (61%).
Although Regions is based in Alabama, it has branches in 14 other states, with Florida sporting the most at 314, followed by 209 in Tennessee — five more than in its home state.
The bank is No. 1 or No. 2 by deposits in three states: Alabama (1), Tennessee (2) and Arkansas (2). In Florida, probably one of the most competitive states in the nation when it comes to banking, it’s ranked No. 7.
Most importantly, its common equity tier 1 ratio is 11.0 — the fourth highest amount of a group of 14 peers that includes U.S. Bancorp (NYSE:USB), one of Warren Buffett’s six bank stocks.
TD Bank (TD)
Source: Mike Mozart via Flickr (Modified)
It’s always nice to be able to include Canadian banks in a list of the best bank stocks to own, especially when it means it’s doing an excellent job outside its home market.
According to GOBankingRates, Toronto-Dominion Bank (NYSE:TD) is the best brick-and-mortar bank in America. This is the second time it has garnered the honor. Its U.S. operations are based in Wilmington, Delaware.
“TD Bank’s motto is ‘bank human,’ and it lives up to it,” stated the personal finance site in early 2018. “With a full range of products and services to match any personal finance needs, more than 1,200 locations and early, late, weekend and holiday hours, you can access a branch at your convenience.”
How much does TD’s U.S. business contribute to the bank’s bottom line?
In the third quarter ended July 31, TD’s U.S. retail bank generated $2.2 billion in revenue and $891 million in adjusted net income, 31.4% higher than in Q3 2017.
Its common equity tier 1 ratio in the quarter was 11.7%, 70 basis points higher than a year earlier.
Yielding 3.4%, TD provides a level of safety many U.S. banks envy.
First Hawaiian Bank (FHB)
Source: Shutterstock
By now you might have noticed that I’m not necessarily choosing bank stocks from the seven largest states by population or wealth.
I’m more interested in finding those little gems that most investors take a pass on as they frantically rush to own one of the big banks.
What could be more niche than owning a bank stock in Hawaii?
Well, as it turns out, Forbes’ annual list of the 100 Best Banks in America has two in the top 20 — I’m going with the higher ranked bank, First Hawaiian (NASDAQ:FHB), which cracked the top ten in ninth position.
I must admit I don’t know a whole lot about the bank other than it’s located in the happiest state in America.
The oldest (founded in 1858) and largest bank in Hawaii, First Hawaiian Bank has 57 branches in the state and another three in Guam and two in Saipan.
Up until First Hawaiian’s IPO in 2016, it was a wholly owned subsidiary of BNP Paribas (OTCMKTS:BNPQY), one of the largest banks in Europe.
In early September, BNP announced that it would sell 20 million additional shares reducing its ownership from 33.3% to 16.2%. BNP first invested in FHB in 1998, upping its ownership to 100% in 2001.
With a long and storied history, along with a healthy 3.5% dividend yield, I’m confident FHB is an excellent long-term hold.
BMO Harris Bank (BMO)
Source: Rajiv Patel Via Flickr
It seems I can’t get enough of the Canadian banks.
Bank of Montreal (NYSE:BMO) has a long history in the state of Illinois which began in 1984 when it acquired Harris Bank for $547 million. At the time, Harris had assets of $7.8 billion, making it the 34th largest bank in America. The acquisition immediately put it on a path to becoming more global.
Today, its U.S. operations account for 28% of the bank’s adjusted earnings. Its personal and commercial banking operations, which includes BMO Harris Bank, accounted for 81% of the bank’s U.S. operations in the third quarter, growing revenues and adjusted net income by 9% and 30%, respectively.
I wonder if its U.S. business is worth more than $547 million today?
And if you’re wondering about its reputation, American Banker named it the second best bank for customer service among America’s 40 largest banks.
Mr. Trump might not like Canada, but its U.S. customers do.
M&T Bank (MTB)
Source: Shutterstock
It’s hard to imagine any bank setting up shop in Buffalo, New York. That’s not a slight against Buffalo; it’s just the reality that many other American cities have grown much faster over the past few decades, rendering the city on Lake Erie less attractive as a banking destination.
However, I would imagine that the city’s lower housing prices — Buffalo’s median house price in March 2018 was $125,000, the 10th cheapest municipality for housing out of 100 candidates — makes it very easy for M&T Bank (NYSE:MTB) to recruit bankers from other, more expensive parts of the country.
M&T Bank is one of Warren Buffett’s six bank stocks. Berkshire Hathaway currently owns 5.38 million shares of the bank worth about $900 million at current prices.
Although M&T Bank’s common equity tier 1 ratio is only 11%, less than many of its peers, the fact that Buffett has held MBT for many years suggests that he enjoys its reliability, both regarding its financial performance and dividend payments.
It’s not the flashiest of the bank stocks, but it is a good one.
Ally Bank (ALLY)
Source: Ally Financial
It wouldn’t be a good list of bank stocks to own without at least one online bank in the mix.
Although Ally Bank’s parent, Ally Financial (NYSE:ALLY) is based in Detroit, the bank itself operates out of Salt Lake City, Utah.
In 2018, Kiplinger named Ally Bank both the best online bank and the best bank for millennials, which is a lucrative demographic to capture, because it provides the bank with a springboard to a long and profitable customer relationship.
Ally makes banking easy and cheap, which are two things millennials look for in a financial institution.
As for the holding company, its business is doing great. In the second quarter, Ally grew adjusted earnings-per-share by 43% year-over-year to 83 cents per share — its best performance since becoming a public company in 2014.
Trading at ten times earnings with a 2.2% dividend yield, it’s a good bank stock to own, whether you’re comparing it to other online banks or brick-and-mortar institutions.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
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