Bank of America (BAC)

US banks have a different seasonality than Canadian banks. Historically the best time to own this bank is from around the end of January right through until May of each year. At this time of year, it does okay, but doesn’t outperform the market. Currently the stock is in a long-term slight upward trend, but his preference is to stick with securities which have strong seasonality right now. He would prefer a Canadian bank over an American bank right now.

He likes banks in general in a rising interest rate environment. It is mid on volatility relative to other banks. PE is 12 times and the yield is 1.8%. US Banks are cheaper than Canadian banks. He does not think mortgages will be a big issue in the US, unlike Canada.

(Market Call Minute.) Not his favourite. Would prefer J.P. Morgan (JPM-N).

If you want to play financials globally, you want to start looking at US financials. This has been in the penalty box for many years. US banks are really like utilities now. This is trading at 10X earnings, while power utilities are trading at 17-18 times earnings. As they start to raise their dividend, they can pay 4% yield. In 2 or 3 years it will look like a utility, but will be at about a 50% valuation discount. Dividend yield of 1.81%.

There are a lot of arguments that as interest rates rise, bank profits increase because margins increase. Looking back at historical evidence, there is actually no evidence whatsoever that earnings or margins increase as interest rates rise. You can make a case that as the Federal Reserve Board raises interest rates, the yield curve actually flattens. Banks are under extreme pressure in other areas that will more than offset those kinds of opportunities. Delinquencies are growing in the automotive sector.

His main bank exposure is Wells Fargo (WFC-N). If you look at the forward PE ratio on US banks, relative to Canadian banks, there was a time when they were very much cheaper. Looking at last Friday’s close on the PE going forward, he feels they are both roughly the same. That would be a disincentive for him to look any further at US banks. (See Top Picks.)

(A Top Pick Nov 16/15. Down 4.12%.) This hasn’t done much, but is sort of typical as all US financials haven’t gone anywhere, which is why he sold his position. There has been a constant deferral of monetary tightening. There is nothing wrong with it, but as an investor do you continue holding on and on when nothing is happening?

(Market Call Minute.) Really likes the investment dealers as a group, and he likes this bank’s numbers.

American banking is not expensive, and the banks are quite reasonably priced. Also, they still haven’t raised their dividends as much as they could. There are likely good times ahead. If interest rates rise, once in 2016 and 2 or 3 times in 2017, this allows banks to increase their net interest rate margins. Expects this will be net positive for the banking industry. Not his 1^st choice, but not a bad choice.

She owns another US bank (WFC-N). You want to buy US banks because of rising interest rates and an improving economy. You could buy BAC-N here and she thinks it will do relatively well over the next year. We should start seeing improvement in the yield.

He likes this quite a bit. The stock recently broke out over one of his key technical breakpoints, and looks to have a pretty good count. The minimum count he would see would be something in the order of 19 ($?), but FMV actually shows quite a bit higher. The issue is what is going to happen to interest rates. If rates are going to go up, this will benefit all the US banks. (This was almost one of his Top Picks today.)

Net interest margins have been collapsing as rates have fallen, and as a result, the earnings have just come in. They have other lines of business such as asset management, but they are extremely competitive areas. This has been trading cheaply for a long time now, a little bit above BV. He likes the name, but you are going to have to be very patient. Rates are going to have to go up and he thinks you will be rewarded. If you can put a 3-5 year time horizon on this investment, you will do well.

You are safe with this. The share price really hasn’t done much over the last 52 weeks, and year-to-date is down about 8%-10%. There is nothing wrong with the entry-level at this point. Trading at around 12X, but you are getting a lousy yield of around 2%. Also, if you are Canadian, you don’t get the dividend tax credit. In the short term there might be a bit of an upside. He would prefer some of the US regional banks.

(A Top Pick Sept 8/15. Down 2.05%.) He still likes the US banks, but his preference now would be J.P. Morgan (JPM-N), Wells Fargo (WFC-N) and some of the others. The issue with US banks has been sentiment related. The money centred banks in the US are exceptionally well capitalized. Because US banks are so well capitalized, they are going to take market share away European counterparts, where the risk rated asset calculations are probably a lot less conservative than they are in the US.

The sector has been so regulated recently that it will not be affected by a new president. The sector has reduced risks now and the valuations should be higher. This one is trading at a discount to its tangible book value. It is worth holding onto. The currency risk is keeping him out of it.