Elliott Gue's Banking Bets

05/10/2017 2:50 am EST


Elliott Gue

Editor and Publisher, Energy and Income Advisor and Capitalist Times

What should be on your shopping list in the event of a general stock market pullback? The financial sector remains at the top of our shopping list, asserts Elliott Gue, editor of Capitalist Times.

Our view is that the decline in aggregate loan balances is temporary and due in part to seasonal factors. For example, mortgage lending activity typically slumps in the first quarter and rebounds in the second due to spring being a homebuying season.

Moreover, careful stock selection can offset this minor economic headwind as some US banks are showing positive loan growth and above-average NIM gains despite the soft Fed data.

Comerica (CMA) is a good example. More than 90 percent of loans made by the Texas-based bank have floating rates, meaning that the lender sees an immediate and automatic benefit when the Fed hikes rates.

That high asset sensitivity explains how the bank saw a 21-basis point sequential increase (0.21 percent) in NIMs during the first quarter of 2017.

Many of its energy loans are to companies based in the bank’s home state of Texas and targeting highly economic formations such as the Permian Basin. Many Texas-based producers in the Permian can drill profitably even with oil at $40 per barrel or lower.

Comerica rates a buy under $75. Investors who already hold a stake in the bank should consider using any dips to the $65 to $69 range to add to their positions.

Citigroup (C) remains our top pick among the mega-banks because of its undemanding valuation (0.9 times book value) and upside leverage to a gradual normalization of US interest rates, an accelerating economy and a lighter regulatory touch under the Trump administration.

Citigroup posted solid first-quarter results, headlined by an 8.5 percent return on tangible equity and strong results in the investment banking segment, which grew its revenue by 16 percent from year-ago levels while limiting expenses to a 1 percent increase.

Capital-markets activity has remained strong thus far in the second quarter, and league tables suggest that Citigroup has captured a sizable chunk of the pie.  Citigroup rates a buy up to $62 per share.

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