Bank of America (BAC)

(Market Call Minute) Reported today with disappointing numbers, but better than what investors were expecting.

If looking for retail/consumer exposure in the US, this is a good way to get into the space. He likes the US consumer, given household debt levels being considerably lower than Canadian. Feels the consumer at some point is going to start doing renovations, buy a nicer home, or upgrade their car. Prefers regional banks, but if you want to step into this one, he would suggest a half position at first on weakness.

If you started hearing talk of the bigger US banks being broken up, the parts are worth more than the whole. This is a longer term thing. This is where you would get the real value from this sector.

(A Top Pick July 27/15. Down 22.51%.) A year ago he thought rates were going to go higher in the fall, but they never did. The bank passed the Fed requirements with flying colours, and are allowed to raise the dividend and buy back stock. They are earning more money and the prospects are better, but they’re getting squeezed by rates being incredibly low. He is holding onto the thought that the Fed probably will raise rates in December.

(A Top Pick March 21/16. Down 4.23%.) He had never thought the US banks, such as this one, would drop 30% from the end of December to mid-February. It has bounced back a little, but is still down roughly 20%. A very rate sensitive bank, but trading below tangible Book. Very cheap on a relative basis, but he questions if this might be a value trap.

He likes this. The key thing is that they have moved through this horrible tunnel of litigation. Because of that, the bottom line should improve. Dividend has been increased from $.01 a share to $.05 a share, and thinks it will go up further. Can see the shares going up quite a distance from here. Dividend yield of 1.6%.

From a valuation standpoint it looks to be pretty cheap at about 10X forward earnings, but these banks have been cheap for a while. The hope of interest rates finally moving higher has really been there to push these bank stocks higher. Interest rates are going to be pushed further along in terms of the pace of hikes down the road. Because of that he has traded this recently, buying at about $13.50-$14 and selling it at $15. There are other names that are a bit more attractive in the US financial space, such as J.P. Morgan (JPM-N).

US banks are much more sensitive to the interest rate spread than what Canadian banks are. The US banks like to take your deposit money in short term and buy bonds that are longer term, and work off of the spread. As the yield curve is flattening as longer term rates come down, that ability to make money on the spread is going away, which is hurting US banks. He also doesn’t like this bank because it is an investment bank. The outlook does not look good, and is not going to be good for a while.

The yield curve is very flat. Securitization was introduced in the 1970s. Banks overearned and expanded their business model. Those days are over. Now you have this big business model and they are asking themselves how they can make money. They used to be able to get through this by making mergers and acquisitions, but they can no longer do that. On the long-term structural view, he is not very bullish on banks. In the short term, if they do get a period of rising interest rates, there may be a nice trade for 6-8 months. Thinks the big banks are going to have to start selling themselves off, because the old business model is no longer profitable.

All banks are going to be affected by the major macro issues of the federal reserve’s monetary policy, and are all basically in the same boat. They are earning money, loan growth is slow but growing, and assets are growing. The thing that is going to allow them to really do well is a steepening of the yield curve, because that increases margins. This is a good core position.

Has been really good at changing their balance sheet, getting rid of bad debt and adding on new loans that are safer. Have also been getting fees from non-interest rate types of operations, such as card fees. All interest bearing revenues in this low interest rate environment, are going to be more challenging. It also has that Libor suit hanging over it right now. However, she feels that suit represents somewhat of a buying opportunity, because the actual liability they may have, even if they lose, is actually pretty small. Dividend yield of 1.5%.

Very cheap. Trading at about 80% of BV. A great franchise. Financials are under pressure. Banks primarily make their money by lending to people and borrowing the spread that they charge on short term deposits. That spread is affected by the overall prevailing interest rates in the market. As rates come down and the yield curve flattens, their net interest margins decrease. At some point in the future, whether this year or next, he thinks some of these clouds will lift and this will return to a more reasonable valuation.

This is a slow growth, low interest rate environment. Interest rates may go up a little bit, which will help the banks. Trading at a cheap multiple, but it needs to see some catalysts to get earnings growing. Hopefully higher interest rates will be it. A reasonable company to own, but they do need a bit of a kick.

Feels some of the other big US money centres are doing much better. This has been struggling to get above resistance. He would prefer J.P. Morgan (JPM-N) which has performed much better. He would also lean towards regional banks, because as interest rates go up, regional banks will really benefit from that due to the number of loans they are making.

(A Top Pick July 15/15. Down 15.02%.) It looked like they were going to start the rate hike cycle last year, and then the Fed scared everybody in December. Sees a lot of risk in the Canadian banks and thinks the US banks are ridiculously cheap. They need the rate hike cycle to start moving.