Bank of America (BAC)

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.

(A Top Pick Jan 23/14. Up 1.44%.) Thinks he was early on this. They are going through their model and are fixing the things that need to be fixed. The market is not prepared to reward them yet. On every quarterly conference call he thinks it will be the last time they have to pay a fine or litigation of some kind, but then there is another one. He thinks they are now at the end of that process and they were just allowed their 1^st dividend increase in the last quarter.

99% of revenue is from the US. The big headwind on legal should be starting to subside. A very, very strong consumer-based business. He likes it very much and thinks it will continue to move higher.

0.8 times book, not at a high PE. 10 times earnings. Legal issues have gone away. 10% of all deposits within the US. Thinks there will be a lot more M&A and so they will do well. Great card business. Sold off non-core assets. Management has done a great job.

J.P. Morgan (JPM-N) or Bank of America (BAC-N)? He is more familiar with J.P. Morgan, so that would be the one he would pick.

This bank would love to be able to have a dividend right now, but are still paying the debts back from the financial crisis and paying what they have to pay to the regulators. Thinks they will eventually be allowed to. There is some good earnings leverage here. This has had a pretty decent run. He has taken a little bit of money off the table.

One of the banks that came out with that very large deal with the US government, paying off a bunch of the charges against it. Sees any of the banks that cleaned out their lawsuits with the US government as generating capital, getting back to more normalized dividend levels with an opportunity to buy back their shares. If housing really starts to recover in the US and the mortgage market starts to recover, they might actually start to do some lending. Dividend yield of 1.16%.