After the banking turmoil of early 2023 that saw several institutions fail, Warren Buffett pared down the bank stocks in Berkshire Hathaway‘s (NYSE: BRK.A)(NYSE: BRK.B) portfolio. However, two stocks that are still on the list are Bank of America (NYSE: BAC) and Ally Financial (NYSE: ALLY).
Both are substantial investments in Berkshire’s portfolio. The Bank of America investment is one of the largest, with a $34 billion market value representing a 9.99% stake in the megabank. Ally is a smaller bank, but Berkshire owns 9.5% of it, an investment worth just over $1 billion.
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It’s fair to say that Warren Buffett and his team are still quite confident in these two financial institutions, but which is best for your portfolio?
Bank of America is one of the largest banks in the United States, and its progress from one of the most troubled institutions in the 2008 financial crisis to one of the most respected has been impressive. In fact, the reason Buffett owns the stock is that he used $5 billion of Berkshire’s capital to give the bank a cash infusion a couple of years after the crisis ended.
The bank has a total of $1.92 trillion in deposits and a little more than $1 trillion in loans. It is a highly profitable institution, with a low deposit cost and excellent asset quality. The bank has done a fantastic job of creating shareholder value through organic growth, as well as through dividends and relatively aggressive stock buybacks.
Like most banks, Bank of America’s interest margins have been under pressure due to rising deposit costs, but the Fed’s rate-cutting cycle could certainly reverse this trend. And unlike some of its banks that are seeing rising charge-off rates (including Ally), Bank of America’s leveled off in 2024 and have been flat for the past three quarters.
If you aren’t familiar, Ally Financial is primarily an auto lender, having spun off from General Motors (NYSE: GM) in the wake of the financial crisis. But in the years since, it has evolved into a full-featured online financial institution with high-yield savings accounts, CDs, other loan types, an investment platform, and much more.
There are a few things to like about Ally. For one thing, auto loans typically have much higher yields than mortgages and commercial loans, which make up the bulk of most big banks’ portfolios. In fact, the average loan originated by Ally in the most recent quarter had a yield of 10.5%, even though the average borrower had a FICO score of 710, well into the realm of “good credit.”
Plus, as an online bank, Ally could be a big winner as interest rates fall. Its average deposit cost is about 4.2% now, and if the Fed keeps lowering rates, this should drop significantly, leading to higher margins. Ally produced an already-strong 3.22% net interest margin in the third quarter but believes it could get to 4% in the medium term.
There are other things to keep an eye on, including the ramp-up in electric vehicle (EV) leasing, which gives Ally a growing stream of EV tax credits.
It’s also worth noting that Ally is down by about 20% from its recent high on fears of rising charge-offs. While that is certainly a concern worth monitoring, at a valuation of 0.88 times book value (for context, Bank of America’s price-to-book (P/B) multiple is 1.25), the risk-reward profile looks attractive.
To be perfectly clear, I don’t necessarily think you’d go wrong with either of these bank stocks, and both are among the larger investments in my own portfolio. But they are two very different bank stocks.
I’d certainly call Bank of America the lower-volatility choice of the two. It’s a massive and highly profitable bank whose revenue and earnings aren’t nearly as sensitive to economic conditions as Ally’s. The bank is stress-tested once a year, and the bulk of its loan portfolio consists of reliable loan types, such as commercial loans and mortgages, which tend to have far lower default rates than auto loans. On the other hand, Ally has a lot more to gain as interest rates (hopefully) fall in the years ahead, especially if the economy is strong.
The bottom line is that the best choice for you depends on your risk tolerance and goals. But these are two well-run and solid financial institutions that are worthy of a closer look.
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Ally is an advertising partner of Motley Fool Money. Bank of America is an advertising partner of Motley Fool Money. Matt Frankel has positions in Ally Financial, Bank of America, Berkshire Hathaway, and General Motors. The Motley Fool has positions in and recommends Bank of America and Berkshire Hathaway. The Motley Fool recommends General Motors and recommends the following options: long January 2025 $25 calls on General Motors. The Motley Fool has a disclosure policy.
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