Bank of America (BAC)

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.

Your favourite US bank? Thinks this is the most compelling story. It trades at a significant discount to all the other banks, at about 8.5X BV. Their biggest problem is that they issued a massive amount of shares in 2008-2010, so their capital ratios are completely online. On a risk adjusted basis, he thinks this one offers the greatest return over the next 12-18 months.

He likes this because it is a domestically focused franchise, good at what they do, and great capital levels. Regulations are taking a softer tone now which helps. Where you have to be cautious on this is the yield curve. Right now, if you look at the spread between the 10 year and the 3-month Treasury yields, it gives you a reasonable proxy for a net interest margin improvement or shrinkage, and this is ultimately going to be a little tough for this company. However, he doesn’t see a lot else to worry about.

It is doing well. Earnings are up 13% and exceeded expectations last quarter. A lot of it is factored in to the stock price. There are better paces to invest right now.

The payout ratio is only about 16% for the fiscal year of 2016. If you look back pre-crisis, the payout ratio is about 45%. If it were to revert back to this ratio, the dividend could triple from here. Under the Trump regime, we definitely have less regulatory glare on the banks. There may be even a possibility of a roll back of portions of the very punitive regulations. Dividend yield of 2.1%. (Analysts’ price target is $27.)

US banks have all had a great run since Donald Trump got elected. This is a strong bank and a solid company, but he sees better opportunities elsewhere. Prefers Goldman Sachs (GS-N) and Morgan Stanley (MS-N).

Bank of America (BAC-N) or J.P. Morgan (JPM-N)? He would give a slight nod to this bank because it is cheaper. Of course, J.P. Morgan has the standout Banker, Jamie Diamond. This one is probably your best pure play for a US economic strong recovery and higher US interest rates. They have a great franchise coast-to-coast. There are lots of loans out there that could adjust higher if interest rates give them a break.

(Market Call Minute.) Berkshire Hathaway has just extended its option to be one of the biggest shareholders of this bank, and you should too.

(A Top Pick Dec 9/16. Up 4.39%.) Synthetic Long Position. Had Bought a Call and Sold a Put which created a position equivalent to buying the stock itself. US banks have been flat and have been almost dead money for most of the year. This is good until January, so he would hold onto this position.

He likes the US financials. The banks are well positioned and are cheap relative to others banks around the world. He prefers C-N for its very international revenues and JPM-N for their management. They are going to continue to pass the stress tests and then can do shareholder friendly things like share buybacks and dividend increases.

ZUB-T vs. BAC-N. ZUB-T is hedged back to CAD$ and is an equal weight mix of US banks. With the economies strengthening around the world these banks can do well. He feels ZUK-T would be okay without the hedging.

If you are a long term investor, the financials are good, although they are rolling over in the short term. He is not as big a fan of the major city banks as of the regional banks. He would keep it.

This is early days for this bank. It still trades well below BV. Earnings are going to really grow dramatically as the yield curve steepens and interest rates start to rise.