Bank of America (BAC)

This bank was hurt badly during 2008-2009. Trading at 7X Book. Feels they did a great job of selling off non-core assets. Has also done a great job of trying to build up its capital although they have had some setbacks.

(A Top Pick July 30/13. Down 44.69%.) (Bought Jan 15 Calls at US$1.79.) These expire in 2015. They were up over $3.90 at their high. This bank fell precipitously when they announced the mispricing of some of the derivatives that they had.

The difficulty is that this bank is too big to fail and the attempt to raise their dividend failed, which will keep them in the doghouse for quite a while. US money centered banks are so big, they can be sitting in litigation for a long, long period of time which can erode their ability to grow their interest income. At the same time, if you are getting sluggish environment right across the board, or in parts of the businesses, wealth management is doing well, but trading is not. If the homebuilders market slows down this bank will be impacted.

He has tended to look at a movement away from the money centered banks because of the regulatory glare of the Dodd-Frank act, the Basel etc. which is a product of the global financial melt. Prefers banks which have a large exposure to credit risks or increasing interest rates. A safe way to do it is to invest through regional banks so he prefers BB&T (BBT-N) and Bank United (BKU-N).

American banking sector is interesting and this bank is one of those that is too big to fail. Their $4 billion accounting glitch is equal to the total profits of most of the Canadian banks for a year, but for this bank it is less than a quarter of profits. Everybody is waiting to see what the regulatory authorities are going to do with the banks. There is a real fear that there is going to be some indictments of bankers and banks having to do with activities prior to 2008. That is putting a damper on all of the US banks right now. There is also a question of what their assets are really worth. There are a lot of “black box” assets i.e. things that are very difficult to value so it is hard to know what the BV really is. Has tremendous earnings power going forward. Doesn’t think it will be $80 but could see $20. (See Top Picks.)

This is a bank that disappointed investors. They were going to increase their dividends and buybacks, but had to cancel because, apparently, they have been doing the math wrong for 5 years. If you own a significant amount of this, that is probably a mistake. He would move your money back to 2 great companies like the Royal Bank (RY-T) and Bank of Nova Scotia (BNS-T).

Not the best bank in the world in regards to making mistakes in their capital ratio. Always being sued, which is a problem, but eventually that tails off. Trading at 8X Book Value and the US economy is growing, the housing market is completely recovered/recovering and the job market is recovering. Has been cheap for a long time.

Its well deserved hit has come. He has no interest in them.

Pretty much shied away from US money centered banks. Banks are really trading off a renewed confidence that everything is not going to fall apart. Really not a lot of growth from a revenue standpoint. Loan growth is anaemic although deposits are pretty strong, which means they are building their balance sheets. This is kind of a negative because they are ending up with larger bond portfolios. Really making their gains through cost cutting which is not a good reason to Buy. There will be a time for them, not just yet.

(Top Pick Apr 26/13, Up 23.03%) This issue about the Fed and their capital is unfortunate. But the theme of this story does not go away. It is a good opportunity to buy it here.

(Market Call Minute) You are going to do well if you stick to it long term.

All of the earnings for the US banks are showing 2 things. On one side, all the big money center banks like this one, are showing some increased earnings, but the reason, in part, is that they are taking out reserves for bad loans. The economy has improved and now they are unwinding those reserves. It is not really core earnings improvement. They are also suffering from the new rules that will apply to their use of capital. He is somewhat neutral on these banks and prefers the European ones, which look a lot cheaper.

Preferred Citigroup (C-N) which was a little bit cheaper, trading at about 8.9X on a forward basis compared to this one at about 10X. Citigroup also has a more interesting upside on the dividend side when the Federal Reserve will give them the ability to increase their dividend. However, he likes the whole sector. As the economy and housing gets better, all the US banks should do well.

Probably has more legs. Lots of financial industry leverage on their balance sheet. US financials are not a bad place to be. Small regional banks give you more bang for your buck if they are recovering.

There is a lot of noise, but it is trading below 1 times book value. 12 months out capital markets, economy, and housing markets will be better, net interest margins are moving forward and loan loss ratios are improving. These big cap bank names will do fine.