Bank of America (BAC)

Pretty attractively priced here. Trading at about 10 or 11 times this year’s earnings. If you believe that we are still in the 1^st half of a bull market, as he does, this is going to continue to participate in that recovery.

Late last year paid a very big settlement to the US Justice Department to settle the majority of its outstanding litigation. Trading below Book and right near tangible Book. Trading at around 10-11 times earnings. Thinks the growth outlook for the US is better than in Canada. Dividend yield of 1.22%.

(A Top Pick Feb 13/14. Down 2.13%.) This has not being great, but decent. In general, the large money centred banks have underperformed the market. Money is coming back to shareholders in the form of dividend increases and share buybacks. All the litigation that has been in the overhang is for the most part behind them. Still a good holding.

He owns 2 American banks, J.P. Morgan (JPM-N) and Goldman Sachs (GS-N). Goldman Sachs for its investment banking activity and J.P. Morgan just for its size and scale. Bank of America has pulled back a lot, but he thinks probably the best straight commercial bank in the US right now is Wells Fargo (WFC-N), and this would be his pick. Most investors should really own Canadian banks because the dividend tax credit gives you a tremendous advantage. He also thinks the earnings momentum in the US is probably reducing.

The US is better than Japan, Russia, despite their huge debt and all the money they are printing. The financials are turning the corner. The acquisitions at the bottom of the market will eventually be accretive. They will start to generate earnings growth. Prefers this over C-N and JPM-N.

(A Top Pick Jan 16/14. Down 10.33%.) Q4 was a bit of a disappointment. Thinks the market is really overlooking its good points. Good credit quality, lower energy exposure than other banks and are levered to a housing recovery and improving US consumer. Cheap at 1X 2015 estimated tangible book value. This is not a question of “If”, but “When”.

It has come off a fair bit as have a lot of the US banks. You have a really good chance to get a great company really cheap.

US banks in general have been struggling under a lot of different things, such as regulatory penalties and increased costs. They just don’t seem to be able to get past getting sued by the government for one thing or another. Thinks the problem is going to become more and more acute.

There were a lot of people that had a view that interest rates would start to work their way higher. With what is going on in Europe and Japan, there are $7 trillion of fixed income assets globally yielding a negative return. There is tremendous pressure on long-term interest rates, which in general is not good for big money centred banks. Because of this, this one and other similar ones have been under pressure. If you believe that rates may stay lower longer, you would be better off focusing on a regional bank that is less dependent on long-term interest rates. He sold his holdings in this bank. In the financials, he prefers REITs and asset managers that will probably benefit from asset growth in a stronger equity market. Wells Fargo (WFC-N) is attractive and is a direct play on US housing.

Earnings were a bit shy today. This is why ETFs are so important. The market is having a hard time digesting different news announcements we are hearing all the time. He really likes US banks. They should do really well. The housing market will do well so mortgages will do well. But he prefers to buy the ETF ZBK-N. Spread your risk out. Later he might move out of the ETF and buy individual stocks.

Until we start to see rates rise and the market take control of the yield curve again, the banks really aren’t going to get any traction. It is very, very difficult to get the timing exactly as to when to buy the stock. Good quality company.

Why is Bank of America (BAC-N) telling us to Short Canadian banks? She does not agree with that. We should all be buying them now because they have pulled back 8%-10% in the last 46 weeks. They are very attractively valued now and she is expecting earnings growth in the 6%-8% range. They all have target payout ratios of 40%-50%, and if you apply that to the earnings to what their current dividends are, it would be in the low end of that range, so she would expect that they would increase their dividends. When the banks reported in early December, their exposure to energy was very manageable. On their total loan book exposure, it is anywhere from below 1% to maybe 2%-3%, depending on the individual bank. (See Top Picks.)

He is not a fan of the big money center banks in the US. Prefers regional. The problem with big money center banks is that they have big capital markets divisions and that is not an area where he wants to focus.

A very good company. Regulatory pressures have held on all of the stocks. The US is not approving any more bank licenses, so competition is decreasing for the US banks. The ones that have the better balance sheets are the ones that will survive and thrive. He prefers others, but if you want a better leverage play, with potentially more upside, this would be yet.

If he had to pick one large cap US bank, it would be this one. The upside for the stock price is quite easily in the low 20%’s. There is a very clear path to significant ROE expansion. If rates go up, net interest margins expand for all the banks. Ignoring that, he thinks there is a significant amount of operating expense reduction that will get realized in 2015, and if you layer on top of that, normalized fixed income, currencies and commodities, you could very easily make the argument that M&A activity will be higher than it was in 2014.