Warren Buffett, the venerable oracle of Omaha, has been pruning his floral bank arrangements, notably snipping away at several holdings. This, of course, has caused a bit of a flutter in the financial aviary. However, amidst the trimming, two specimens stand out, robust and blooming: American Express (Amex) and Ally Financial. These, I believe, warrant a closer look, even with the broader banking sector facing a touch of the economic blues.
Markets shift, but strategy endures—Buffett’s vision blends past and future
Amex: The Ever-Golden Credit Giant
American Express isn’t just another credit card company; it’s a symbol of financial prestige. Berkshire’s 21.6% stake, worth nearly \$46 billion, is a clear signal that Buffett is playing the long game.
Why? Because Amex isn’t just about transactions—it’s about premium experiences. Its elite customer base treats economic downturns like a mild inconvenience.
Some might worry about credit cards in uncertain times. But here’s the kicker—Amex’s card member charge-off rate is just 1.9%, far below Capital One’s, which is roughly three times higher. That’s a testament to its affluent customer base and stringent risk management.
Resilience & Growth: The Amex Way
Amex has weathered storms before. The Costco breakup in 2016? A blow, yes, but Amex rebounded spectacularly, delivering a 327% total return over the past decade—leaving the S&P 500 in the dust.
Valuation-wise, it remains attractive. With a P/E ratio of 20.25 and an EPS of \$14.00, analysts are eyeing a one-year target of \$317.04. The 1.16% dividend yield may not set the world alight, but it’s a solid sweetener.
Return on equity (ROE) is a Buffett favourite, and Amex shines here. As of February 28, 2025, its ROE stands at an impressive 32.85%, improving from its 12-month average of 30.97% and well above its five-year average of 27.81%.
One lesser-known advantage? Amex’s closed-loop network gives it unique data insights, allowing it to refine its services and deepen customer loyalty.
Amex vs. The Competition
Amex operates in a different league compared to rivals like $Visa(V)$ and $MasterCard(MA)$. Unlike those two, which act solely as payment networks, Amex is both a network and an issuer, giving it greater control over fees and customer relationships.
However, this model comes with a trade-off—higher merchant fees mean some businesses opt not to accept $American Express(AXP)$. But here’s the twist: that very exclusivity reinforces its luxury appeal. While Visa and Mastercard serve the masses, Amex thrives on a select, high-spending clientele.
Fundamentals don’t lie—AXP’s strength endures, while ALLY fights back
Ally: The Digital Powerhouse Driving Forward
Ally Financial is a different beast—modern, digital-first, and laser-focused on auto lending. Berkshire holds a 9.4% stake worth \$1.1 billion, a clear vote of confidence.
Auto lending is its bread and butter, with \$39 billion in originations in 2024 alone. The average borrower’s FICO score? North of 700. Initial loan yield? A juicy 10.4%.
Beyond Auto Loans: Ally’s Digital Edge
Ally isn’t just about cars. Its digital banking arm boasts over \$140 billion in deposits, positioning it for margin expansion as interest rates begin their downward march.
With a P/E ratio of 19.58 and an EPS of \$1.78, it’s priced attractively. The one-year target? \$45.06. And the 3.41% dividend yield? A cherry on top.
However, Ally’s return on equity (ROE) tells a different story. As of March 4, 2025, its ROE sits at 4.01%, a steep decline from its 12-month average of 5.30% and well below its five-year average of 10.51%. While this dip reflects near-term struggles, it also highlights potential for a turnaround as profitability improves.
What many investors may not realise is Ally’s strategic digital edge. Younger generations are ditching brick-and-mortar banking, and Ally’s seamless online platform gives it a leg up in this digital revolution.
Tradition meets disruption—where timeless value collides with digital evolution
Ally vs. The Competition
Ally operates in an increasingly competitive digital banking space. Unlike traditional giants like JPMorgan or Wells Fargo, Ally has no physical branches, keeping costs low. However, it faces stiff competition from fintech disruptors like $SoFi Technologies Inc.(SOFI)$ and Chime.
That said, $Ally(ALLY)$ has a trump card—auto lending. Fintechs might be shaking up personal finance, but few can match Ally’s dominance in vehicle financing. This niche focus could be its key advantage in the long run.
To Buy or Not to Buy?
Market timing is a fool’s errand, but fundamentals don’t lie. Both Amex and Ally offer compelling cases.
Amex: A long-term hold. Its brand strength, premium clientele, and strong financials make it an attractive buy, especially on dips.
Ally: A high-potential play with a strong dividend. Its digital model and auto lending niche make it well-positioned for growth. If shares drop below \$34, it’s an even juicier buy.
AXP outpaces the market—Buffett’s bet on resilience pays off
Final Thoughts: A Blend of Tradition & Innovation
Buffett may be trimming his banking exposure, but Amex and Ally remain his golden picks. One is a pillar of financial prestige, the other a rising digital force.
Together, they offer a unique blend of stability and modern disruption. Not a bad duo to consider for the portfolio, wouldn’t you say?
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