What would Warren Buffett think of the banking royal commission?

By Brenton Schaeche

May 11 2018
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It’s no great secret that Warren Buffett likes to take a long-term view of things, but how can these pearls of wisdom be applied to the decisions you make regarding your own portfolio?

What would Warren Buffett think of the banking royal commission?

“If you aren’t thinking about owning a stock for 10 years, don’t even think about owning it for 10 minutes.”

Fortunately, placing yourself into the mind-set of the Oracle of Omaha, dubbed the world’s greatest investor, is made easier by events like last weekend’s Berkshire Hathaway annual meeting. During an almost six-hour straight question and answer session, Mr Buffett fielded queries on topics ranging from cryptocurrencies to Elon Musk.

One of the most pointed questions Mr Buffett was asked during his Q&A was regarding Berkshire Hathaway’s 10 per cent stake in troubled US banking institution, Wells Fargo.

“I see no reason why Wells Fargo as a company from both an investment standpoint and a moral standpoint going forward is in any way inferior to the other banks with which it competes. They made a very big mistake …. But I like it as an investment.”

In 2016, Wells Fargo was fined US$185 million for creating savings and checking accounts for millions of people without their consent, leading to the resignation of CEO John Stumpf, and an investigation by the Senate Banking Committee. Just last month, Wells Fargo was fined a further US$1 billion over previous abuses in its auto-lending and mortgage businesses. Yet Mr Buffett and his right-hand man, Charlie Munger, remain bullish about the bank’s long-term value prospects;

“Wells Fargo will be better going forward. They’re likely to behave the best of all the banks in the future.”

It is not a long bow to draw parallels between the situation that the Australian banking sector finds themselves in with the royal commission, and Mr Buffett’s position on Wells Fargo. These banks and institutions have been rightfully pilloried of late for their role in the mis-selling of financial advice and misleading regulators, as well as money laundering and the rigging of benchmark interest rates. Yet their fundamental business models continue to be strong in a profitable domestic environment.

Since the beginning of the royal commission, shares in AMP have slid more than 20 per cent on the back of the controversy, as well as a 5 per cent slide in the share price of the big four banks. Overall though, the Australian banking sector remains one of the world’s most lucrative, with bank profits accounting for 2.9 per cent of the country’s GDP, the largest share globally.

“Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misappraised.”

Applying Mr Buffett’s investing advice regarding Wells Fargo to the current situation in the Australian banking sector is more art than science, but the similarities are plain to see. Both are in the midst of scandal and face a degree of uncertainty regarding the short-term ramifications of their respective circumstances.

However, both have demonstrated strong underlying value historically, and Wells Fargo has given Mr Buffett cause to believe in its long-term potential, beyond its immediate troubles. If Mr Buffett was to cast his eye to the Australian market, does it not seem probable that he would view the banking sector in much the same manner?

Brenton Schaeche is senior investment adviser at OzFinancial.

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