Sunday, November 07, 2010

Time for the big banks?

The big U.S. banks, Bank of America, JPMorgan Chase, Citicorp, Wells Fargo, and U.S. Bancorp, may be ready to join the equity market recovery. All things being equal, meaning no unpredictable global catastrophes, an equal weighted portfolio of these names would almost certainly show 15% gain over the next six months. It could be much higher. That's an opinion.


---The Fed is analyzing the companies and will almost certainly give three of these banks the go ahead to raise dividends and initiate stock buybacks in the near future. The firms that may still have some restrictions near term would be Citicorp and Bank of America.

---Much of the financial reform bill is in the form of broad rules, guidelines, and goals with the implementation details still to be filled in by government agencies. Some implementation could require congressional approval for additional funding. With the election results, some of the potential for worst outcomes in implementation(for the banks and their shareholders) are now unlikely.

---Elizabeth Warren will be in check. The intent of the consumer protection legislation is positive, and much of the regulation is needed. Warren, however, is perceived as a zealot whose beliefs if followed would destroy business models and deprive banks of profitability and leave a broad group of consumers with severely limited credit choices. If approved by Congress, she would have reported to no one under the legislation, sort of like the head of the Federal Reserve. To get around opposition President Obama appointed her as an advisor to implement the consumer protection rules. Now she could never be approved and if she remains the de facto head of the agency she will still report to the White House. Bet here is that she will now be practical and focus on the most constructive parts of the needed regulation. That reassures investors.

---Credit costs are leveling off at high levels, the free fall is over, and adequate reserves are on the balance sheets. This has been a horrific recession on the credit front, but the traditional pattern may be intact. This could be the point at which investors begin to believe that the uncertainty lies in the timing of the upside, less reserves set aside, declining charge-offs, and the ability to step back and think about lending again(making money) rather than spending all of management time playing defense.

---This big brouhaha about banks being required to buy back mortgages with technical flaws from Fannie, Freddie, Pimco, and others is a fight among titans for financial advantage. To assume that the GSE's or Pimco were naive participants in this market is bizarre. They are not illiterate home buyers being led into a toxic adjustable rate mortgages to buy something they can't possibly afford. This will end up in the courts and evolve over several years.

---The mentioned banks have formidable franchises. USB, WFC, JPM, and BAC combined have an almost oligopolistic competitive advantage in U.S. retail banking with their scale and reach. JPM has a leading global investment banking capability as well while Citi has a completely underappreciated global consumer franchise that may well be worth more than what the stock is trading at today on its own.

When this blogger begins to offer opinions on individual stocks, rather than sticking to macro market comments, it could well be the sign of a frothy market. Be careful. Nevertheless I did start eating my own cooking this past week, adding to Citi, and starting new positions in USB and BAC. JPM is already full here and as to WFC, probably incorrectly, I am still concerned about that Golden West franchise embedded in the Wachovia purchase. The Countrywide trash at BAC seems exposed, the WAMU junk at JPM as well, but WFC seems to have Golden West covered. Maybe they are the best of the bunch but I don't know. WFC had the largest gain of the group for the week.


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