Bank of America (BAC)

(A Top Pick Dec 13/16. Up 20%.) We are still very early in a revaluation of US banks. Trading at 1X Book. BV is growing, so there could be an expansion of the multiple of BV. Tax reform would be good for this bank. 85% of its revenues come from the US.

When in a strong market and there is clear leadership, there is no reason to jump from one boxcar to another. If the things causing structural change are continuing to strengthen, that is a good reason to stay in position. There are 4 key things that are going to move this higher. 1.) Rising interest rates. 2.) Deregulation. 3.) Cost cutting. (Have cut $10 billion of expenses since 2010.) 4.) Economic growth is accelerating, which helps grow business. Raised their dividend 60% last year, and it is going to increase again this year. Financials can be revalued, multiples can expand and earnings can get better, for 5 to 7 years. Dividend yield of 1.8%. (Analysts’ price target is $29.)

(A Top Pick Nov 30/16. Up 27%.) Banks are going to do well in this environment, because they are set up for it. They’ve had 8-9 years to repair their balance sheets. The economy is reasonably good. Feels there is a longer runway for the banks, because before the yield curve turns over, it will get steeper.

This entire space has been doing well and there is more opportunity to continue grinding higher. They have a lot of company specific issues, with a lot around capital returns and expense controls. The industry has been kind of stuck at this level of operating expenses, so there are a lot of questions on being able to reduce the cost base through technology. It will be interesting to see how this plays out. If they can get some good expense leverage, plus capital return, there is a lot of capital on their balance sheets with their tier 1 ratios that can come back. It seems that, with this administration, they are going to accommodate that. Thinks the group continues to grind higher.

This is a bank she favours. It has had a lot of improvements on their metrics. They have strong growth in credit cards and investment banking. She expects only 7% earnings growth for next year but it is one of her favourites.

A great story. Trading at 12X earnings. Thinks Book is going to be around 26 this year, a little bit above BV. The issue is very simple. They've cut costs, gotten rid of businesses in parts of the world they didn't want to be in, and are between #1 and #4 in investment banking. Trading at 1.1X Book, and feels it should trade at 1.5X. Expects a massive amount of cost cutting in the banks over the next 5-10 years, because technology is really catching up to the banking industry. Dividend yield of 1.7%. (Analysts' price target is $29.)

He likes this bank, and is one of his top US holdings. Expects it is going to move with expectations of interest rates. Loan growth, consumer spending and business optimism is high. He could see this trading at 15X Earnings and as a $32 stock next year.

Financials are one of his favourite sectors. Feels the wind is at the back of the banks. They are showing the healthiest balance sheets in 60 years. Interest rates are creeping higher, and the whole economy is doing quite well. Although this is up a lot over the past 12 months, it is still trading at a discount to where tangible BV will be 3 or 4 years from now. Really good value here.

He likes the large US investment banks. Prefers Goldman Sachs (GS-N) and Morgan Stanley (MS-N). However, the whole sector is going to be a beneficiary of rising interest rates, a beneficiary of ongoing recovery around the world, including Europe. These are all very well capitalized, and this one is going to have an earning’s bump this year.

(A Top Pick Dec 1/16. Up 22.91%.) This is still statistically cheap, and he still likes it.

Prefers regional US banks. When you go with the regional banks, you are getting pure banking and exposure to loan growth with exposure to higher interest rates helping them. With the centre moneyed banks, you are also bringing capital markets into play, which is an area he doesn’t want to play in right now.

Has a target of $30. He is very, very happy to continue holding this and thinks there is still lots of upside.

Owns 10% of deposits in the US, so they could grow through retail acquisitions. However, they are going to grow by organic growth. They have a great retail franchise and great asset management, brokerage and investment banking business, a well-rounded company. Trading close to BV, which he thinks is going to go up to $26.66 next year. The intrinsic value is somewhere around $38-$40. Dividend yield of 1.9%. (Analysts’ price target is $27.)

It is a more domestically focused bank. 40% of business is from corporate and consumer banking. 20% of revenue is from wealth management which they have done a good job with. Business conditions are improving in the US. Higher interest rates are going to give them the ability to make a better interest margin. ROE could go from 7 to 10%. It is trading at 1 times its book value vs. 3 for norms and for Canadian banks. (Analysts’ target: $27.00).

He continues to like this. Every 1% increase in interest rates will be beneficial to the company by about $5 billion to the bottom line. If you back that through their P&L shares outstanding, it’s about $0.50 a share. A very, very accretive thing for the company. There is lots of gas left in the banks, and particularly in this one.