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Warren Buffett Is Now Betting $29 Billion on This Bank Stock -- Here's Why

Matthew Frankel, CFP, The Motley Fool

There are quite a few bank stocks in Berkshire Hathaway's (NYSE: BRK-A) (NYSE: BRK-B) portfolio, and most were chosen by Warren Buffett himself. At the end of the first quarter, Berkshire owned shares of 10 different banks, and these positions have a current market value of more than $91 billion.

However, we just learned that Buffett and his team have added even more to the company's largest bank-stock investment, Bank of America (NYSE: BAC). In fact, Berkshire's latest Bank of America stock purchase pushes the stake past the 10% ownership threshold. Here's why that's such a big deal.

Warren Buffett smiling with a crowd of people behind him.

Image source: The Motley Fool.

Berkshire's latest Bank of America purchase and why it's so significant

In a recent SEC filing, Bank of America disclosed that Berkshire Hathaway owns 950 million shares of the bank. This is significantly higher than the approximately 896.2 million shares it owned at the end of the first quarter.

At the current stock price, the additional 53.8 million shares Berkshire has purchased translates to an additional $1.64 billion invested in what was already the company's largest bank-stock investment. Berkshire's Bank of America stake is now worth about $29 billion, still well behind tech giant Apple, Berkshire's largest investment with a $51.7 billion market value, but a firm second place in front of Coca-Cola, a $21.2 billion investment.

Here's why this is so important. Thanks to a combination of the increased Berkshire investment and Bank of America's aggressive share buybacks, Berkshire Hathaway now owns 10.4% of the bank's outstanding shares.

The 10% ownership level is significant, especially when it comes to banks. In the past, Buffett has actively avoided owning more than 10% of most of his bank stocks -- even selling significant amounts of Wells Fargo stock to remain under this threshold. Without going too deep into the implications of owning more than 10% of a bank, the point is that Buffett's willingness to deal with additional regulatory headaches in order to own a bigger piece of Bank of America shows extreme confidence in the stock.

Why might Buffett be so confident in Bank of America?

A look at Bank of America's recent results shows why Buffett might be especially eager to invest. For one thing, Bank of America is doing a better job of growing than the rest of the big banks.

Bank of America's loan portfolio and deposit base grew by 4% and 6%, respectively, in the second quarter of 2019 on a year-over-year basis. The second-highest loan growth among the "big four" U.S. banks was just 2%.

Furthermore, Bank of America has done a fantastic job of improving efficiency and continues to increase its profitability. The bank's 11.6% return on equity (ROE) and 1.23% return on assets (ROA) would have seemed ludicrous just a few years ago.

From a value-investor's standpoint, Bank of America looks like a bargain. At just 1.15 times book value and 10.8 times trailing-12-month earnings, Bank of America is performing well and continues to improve, but the improvements haven't been reflected in the stock price.

Is Buffett buying other bank stocks, as well?

To be clear, the only reason we know about Berkshire's latest Bank of America investment is because it caused the 10% ownership threshold to be exceeded. In recent quarters, Berkshire has added to several of its bank stock investments, including JPMorgan Chase and Goldman Sachs, just to name a couple.

Since Berkshire isn't even close to a 10% ownership stake with these and several other bank investments, when Berkshire's next 13-F filing is available in mid-August, it's entirely possible that we'll discover that Bank of America isn't the only bank stock Warren Buffett has been buying recently.

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Matthew Frankel, CFP owns shares of Apple, Bank of America, and Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Apple and Berkshire Hathaway (B shares). The Motley Fool has the following options: short January 2021 $200 puts on Berkshire Hathaway (B shares), long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2020 $155 calls on Apple, long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, and long January 2020 $150 calls on Apple. The Motley Fool has a disclosure policy.