Berkshire Hathaway (BRK.B) is the giant conglomerate and investment company that has been built up b...
Banking Bets: Comerica and Citigroup
04/03/2017 2:50 am EST
The key to outperforming the market this year will be careful selection of sectors and stocks rather than relying on the rising tide of easy monetary policy to float the market as a whole, explains Elliott Gue, editor of Capitalist Times.
Financial stocks should continue to benefit from the Fed bumping up the benchmark interest rate. Although it will be tough for President Trump and the GOP majority in Congress to repeal Dodd-Frank in its entirety this year, we do believe changes will be made that benefit the banks from a regulatory standpoint.
The most recent financial addition to our Wealth Builders Portfolio is Comerica (CMA), which is focused on commercial lending at floating rates indexed to the prime rate, LIBOR or another benchmark. Rising interest rates flow directly to the bottom line when the rates on loans reset higher.
With well over $50 billion in assets, Comerica is currently categorized as a SIFI (systemically important financial institution); the bank would lose that designation -– and all of the associated regulations –- if the asset threshold increased to $250 billion.
This would allow the bank to return additional capital to shareholders in the form of a higher dividend and share buybacks. Comerica remains a buy up to $73.
Our large-cap financial pick is Citigroup (C), which continues to trade at a sizable discount to its peers.
The big story for Citigroup from a regulatory standpoint will be a potential redesign of stress tests in 2018. These stress tests, administered by the Fed, attempt to model a banks’ capital position based on a variety of macroeconomic scenarios.
Currently, Citi burns through an unusually large amount of capital in some of the more adverse macroeconomic scenarios, limiting the bank’s ability to boost its dividend and buy back stock.
If the stress tests change or become more transparent, Citigroup could better adjust its business to improve its capital position under the adverse scenarios. This would allow the bank to return more capital to shareholders. Citi rates a buy under $62.
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