Thursday's session was strong for banks in general, with the KBW Bank Index (I:BKX) rising over 1% to close at 53.60, after Bloomberg reported that Warren Buffett was fully confident that the biggest U.S. banks had sufficiently boosted their financial strength. "The banks will not get this country in trouble, I guarantee it," he said.
Back in August 2011 when Buffett's Berkshire Hathaway (BRK.B) purchased $5 billion in newly issued Bank of America preferred shares, with a fat coupon of 6%, Berkshire also was granted warrants to purchase up to 700 million Bank of America shares at a price of $7.14, for a ten-year period.
Bank of America's shares reversed course after declining by 6% over the previous three sessions.Bank of America will have to pay a 5% premium when redeeming any of the preferred shares held by Berkshire Hathaway. Of course, the real gravy for Berkshire - on top of the healthy dividend yield on the preferred shares during a period of historically low interest rates - is that the value of the warrants has increased by $3.2 billion since they were granted on Aug 25, 2011. The warrants gained $245 million in value on Thursday alone. Buffet said that Berkshire was in "no hurry" to exercise the options: "Nine years from now I would think that Bank of America as well as Wells Fargo (WFC - Get Report) and probably the other major banks will be worth considerably more money than they are now." Wells Fargo will kick off bank earnings season on Friday, before the market opens. The Berkshire Hathaway CEO was also quoted as saying that "our banking system is in the best shape in recent memory." Bank of America's estimated Basel III Tier 1 capital ratio was 8.97% as of Sept. 30, which was the highest among the "big four" U.S. banks, although the Federal Reserve won't fully phase-in the enhanced capital ratio requirements until 2019. Wells Fargo's estimated Basel III Tier 1 common equity ratio at the end of the third quarter was 8.02%, while Citigroup (C - Get Report) estimated that its Basel III Tier 1 common equity ratio was 8.6% and JPMorgan Chase (JPM - Get Report) estimated that its ratio was 8.4%.
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