Is Warren Buffett Responsible for This Bank's Turnaround?


After a huge 2012 run for Bank of America , perhaps investors should consider sending Warren Buffett a New Year's gift basket. The impressive results we saw last year may never have happened if Buffett and Berkshire Hathaway hadn't invested big-time in Bank of America, during a particularly tough time in 2011. Credit should be given where credit is due; but does Buffett really deserve all of it?

A brief history of time (and money)
While other banks had been recovering from the financial crisis, Bank of America was still struggling in 2011. Many investors and analysts had concerns about the bank's capital levels and legal woes. Adding insult to injury, the company reported an $8.8 billion loss, mostly due to settlements with mortgage investors . Though CEO Brian Moynihan tried to reassure Wall Street that the bank was in tip-top shape, and didn't need to raise more capital, Buffett presented him with a deal: $5 billion in preferred shares with a 6% dividend.

This wasn't the first time that Buffett had stepped in to help a struggling financial firm. In 2008, Berkshire invested $5 billion in Goldman Sachs , but charged it a heftier fee, with a 10% dividend . Though Moynihan initially resisted, Buffett's investment was a vote of confidence in the bank -- something it desperately needed. The deal was struck within a day's time.

Flash forward to 2012
Bank of America's stock doubled. Though it still sits lower than the bank's tangible book value, it's creeping closer to that benchmark -- something the stock hasn't done since early 2011.

Source: Yahoo! Finance

Both the S&P 500 and Berkshire couldn't keep up with BAC's growth in 2012. Investors finally saw that the bank was making a comeback, thanks to Buffett's "seal of approval," as one Barclays analyst put it. But, while Buffet's move may have given investors some confidence, it wasn't the catalyst for Bank of America's incredible year.

What really matters
One man's opinion of a business can only go so far -- even if that man is Warren Buffett. His investment in Bank of America, though impactful, was not enough to propel the company forward in 2012. In fact, the period after his investment gives a very different picture of how BAC's stock moved:

Source: Yahoo! Finance

The real power behind Bank of America's resurgence was a new focus. The bank was taking strides to get itself in shape, put its legal troubles behind it, and refocus on strengthening its balance sheet.

Under Moynihan's Project New BAC, the company placed non-core business segments on the chopping block -- relieving the bank of unnecessary weight. And yes, there are, of course, the lay-offs, which no one likes, but are sometimes a necessary evil.

The new initiatives have also focused on reducing the bank's non-performing loans, which have dropped from 4.4% of its loan portfolio in 2009, to 2.9% in September 2012 . And though it's taken a financial hit totaling $13.7 billion , B of A has been settling its legal battles, making it possible to move forward.

The bank also built up its capital reserves in the run-up to implementation of the Basel III requirements, surpassing some of its competitors in preparedness.


Capital Balance

Capital Ratio under Basel III

Bank of America

$136.4 billion



$106 billion



$139 billion


Source: Company Q3 2012 earning presentations

The recent announcement of Basel III rules loosening gives Bank of America further confidence for expanding its business without worrying about its capital. Creditors now have more confidence in the bank, allowing it to save money on borrowing costs .

Moving forward
With the changes made throughout 2012, Bank of America positioned itself for further improvements in 2013. Analysts have recently upgraded the bank to "market perform," though it may continue to exceed that benchmark.

Warren Buffett's long track record of success has made him one of the best investors of all time. Investors have confidence in his picks, and he can be a great ally to have if your firm is struggling. But even with his vote of confidence, you still need to manage your business in a way that brings it back from the brink -- which is exactly what Bank of America has done. To learn more about the most-talked-about bank out there, and its recent changes, check out our in-depth company report on Bank of America. Our top financial analysts have broken down BCA's movements and explain its prospects. For easy access, click here.

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Jessica Alling has no position in any stocks mentioned. The Motley Fool recommends Goldman Sachs Group, Inc. The Motley Fool owns shares of Citigroup Inc and JPMorgan Chase & Co. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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