Bank of America (BAC)

Hold on until July? This is a four-month call on financials in the face of a period where the federal reserve has gotten more dovish about interest rates. He feels more comfortable in saying “Buying this bank in this range will make you money over the next couple of years”.

He likes this bank. It has been a difficult time for US banks. They have bounced back a little, but not substantially. This one trades at about .6X BV, .9X tangible Book Value with a 1.5% dividend yield. You are going to see about 4% revenue growth. With interest rates slowly going up in the US, Net Interest Margins will stabilize. They have been very good at keeping their cost structure very tight. You could actually see a reasonable return on this. Doesn’t see ROEs getting more than 10 or 12, so there is not a lot of upside because of the regulatory environment. Historically if you saw banks trading below BV over the long-term, you have made money. US banks are massively over capitalized, so they are either going to start to buy back their stock or pay out more dividend.

What drives stocks are earnings and the cash flow they generate. He doesn’t see the growth potential with this bank. Haven’t grown their earnings in well over 3 years, and has an ROE that is well below its cost of capital. Their efficiency ratio is one of the higher ones at almost 69%. Prefers some of the regional banks.

Citigroup (C-N) or Bank of America (BAC-N)? Trading at .6 to Tangible Book which is extremely low. It has been low for a while, but that doesn’t mean it can’t go lower. Everybody has been looking for a catalyst in this group. The consensus is that higher interest rates will do it. A 1% rise in interest rates will create billions of dollars of net income for these banks.

He would not go for money center banks. He favours regional banks where there is loan growth, new branches, adding customers. BBT-N and BKU-N are preferences.

A high-quality bank. There are some hairs on it from before, but they have gone through all of that. With the buyback announcement last week, it just showed the strength of their capital now. This is telling you that they feel they have the capital to withstand any shocks. A much better bank that it was in 2008-2009. Trading at around 10X earnings.

7% return on equity. But today the big banks in the US just can’t make as much money as they used to. They can’t get back to the glory days due to regulation.

Bank of America (BAC-N) or Citigroup (C-N)? His calculations are indicate that the balance sheet of both banks are impaired. The stated assets aren’t worth what the balance sheet shows. They are better than any of the European banks, but thinks they are just far too big. Each of them have $2 trillion of assets, and the market is just not liking them right now. On any inflation, these 2 will feel it more than any American stock. His model price on this is $16.93, so there is a 30% upside.

When anything becomes political, it can become close to un-investable. Right now, large cap banks are in an impossible operating environment as a result of overregulation and politics. This chart has not been good and capital market volumes have been pretty atrocious. There are better places to be in the market.

Most American banks are still quite unpopular. He would rate this one as probably his 4^th most favourite US bank, so he is not a buyer. If you are going to buy a US bank, it should probably be Wells Fargo (WFC-N). If you want some investment banking mixed in, J.P. Morgan (JPM-N) or Goldman Sachs (GS-N).

Bank of America (BAC-N) or Citigroup (C-N)? This has not done well lately. There is a good chance they will raise the dividend. Prefers this over Citi. Feels it could triple from where it is now.

It took a lot of work to get out from underneath the fines and the cost cutting. At this stage they are more or less free of the past and are ready for the economy to rock ‘n roll, which unfortunately has not happened. The foundation has been laid. The real issue is that the general economy has not picked up much. Not expensive.

Of all US banks, this has a projected total return of 44% in price, 1.6% dividend and a forward ratio of 4.3%. The cheapest of the US banks. He prefers Wells Fargo (WFC-N).

Bank of America (BAC-N) or Citigroup (C-N)? The real driver is what interest rates are going to do. Stock had been performing pretty decently on expectation that the Fed would continue raising rates, but the Fed started reversing course. There were also fears of debt problems. She still prefers to own banks at a fraction of their BV, even if that comes off a little. A pretty good cushion here with trading at a fraction of BV. If one does well, the other will do well also.

Not one of his favourite banks. If he was trading this, it would be for a very, very short period of time. This is mired at this kind of range for him.