Lloyds TSB Group PLC (LYG)

This has been in a bit of a turnaround situation. Loan growth is falling. Deposit growth is falling. Net interest income growth is plummeting. ROE is only at 5%. Dividend yield of 3.7%.

A purely commercial/retail banker in the UK. They understand how to do retail very, very well. Secondly, they’ve exited a lot of their other businesses and became a solely UK bank. Very cost effective bank. Management is very strong and are going to continue to increase dividends. This is a great story.

When he thinks of financial exposure, he prefers US banks, as he expects an increase in consumer and corporate loan growth, which is necessary for the US economy to chug along in 2017-2018. Looking at some of the international banks, he worries that there is a lot of uncertainty, especially with BREXIT and the triggering of article 50 and the potential political risk in Europe with national elections happening in France and Germany.

Lloyds (LLOY-LN) and/or Barclays (BCS-N)? Some European banks will generally follow US banks up a couple of years later. When the US went into Armageddon, they lowered rates and exported capital, and that caused rates globally to go down. The Europeans with the UK raised rates within a year. So he thinks this will be the same, but if the US starts to raise rates aggressively, that could speed up the process where higher interest rates in Europe make sense. This bank just purchased the credit card business from NBNA, and that is going to be quite good for the stock. In a BREXIT context, this is effectively a domestic bank. If the returns are less because of lower currency, you might have some challenges. In both cases, you want to be a little careful. He would consider looking at Banco Santander (SAN-N), which survived relatively well during the crisis.

Primarily a retail and commercial bank in the UK. The banking industry is changing quite dramatically, but this one has really made an effort to change the way they are thought about. This fell quite dramatically in 2008, and new management came in. A great franchise and thinks it was ahead of itself. You can buy it here and do well over the next little while.

The turnaround is now in Europe with a lot of the banks, but the German banks are still not in a position. This one is looking better, and is going to end up looking like the US banks in the next year or so as things unfold. (See Top Picks.)

During BREXIT, he felt it was an overreaction and started looking at companies, including a number of financial institutions that were located in London. He liked this one, but chose Barclays instead.

Sold his holdings leading into BREXIT on concerns of what that could do to the financial services sector. That is the one sector in the UK where he worries about what is going to happen with respect to employment and longer-term growth. This bank is going to be somewhat challenged, however the valuation looks compelling. He may re-enter this at some point once he gets more confident about what the domestic economy is going to look like in 2017.

We have to go through this transition of preparing the banks from what happened almost a decade ago. They are beginning. Prefers other banks. (See Top Picks.)

(Market Call Minute.) 6.5% yield, cheap on a multiple basis. Terrific.

(Market Call Minute.) This is probably one of the better European banks. He doesn’t own any European banks because of interest rates being where they are.

The whole sector in general has not been a good place to be. There is not a lot of good inertia there. It had based for quite a time. He does not see a catalyst. You can only take a small position and wait for confirmation.

He is looking at this, as it is the only really retail UK bank. The only play on the UK mortgage market, and the shares are very, very cheap. They got hammered with BREXIT, and suffered with the financial crisis. If BREXIT does happen, it suddenly turns a lot of the home loans sour, which never ends well. He is currently assessing the risk. There is no visibility here, which he likes, because often times it can lead to great opportunities.

Too much risk. The valuations look attractive, but you could have said that a few times over the last several quarters. There is still lots of uncertainty with how the euro zone is going to unfold in the coming years. Until there is certainty on a geopolitical front, the selloff can continue.

Has no exposure to UK banks right now. If you are looking for income, these are fine. They give you a nice dividend, but you are not going to get that capital appreciation. He looks for banks that can grow.