Are the big banks value traps?


A guarded "no," argue KBW's Frederick Cannon and Matthew Dinneen. "It is beginning to be difficult to envision an environment where earnings headwinds, regulatory pressure, the structure of interest rates and investor sentiment get worse for universal banks ... [Further] credit conditions are likely to improve through 2015. Thus it is a good time, in our view, for contrarians to take another look at universal banks."

RBC's Jonathan Golub has 4.5 reasons to like the banks: 1) Rising rates will benefit; 2) Loan growth is set to accelerate (the team notes eased C&I lending standards); 3) Capital returns; 4) Credit improvement; 4.5) M&A activity is picking up, through trading business remains sluggish.

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Comments (1)
  • Brice Mckalip
    , contributor
    Comments (196) | Send Message
     
    And to each of the four I'd respond:
    1) but banks' have very positive net duration so this is a negative to equity value
    2) but the yields on those loans are very low
    3) returning capital is what you do when you have nothing good to invest in, not what you do when your industry is expecting good times
    4) junk yield spreads show this is already priced in
    4.5) indeed, trading remains sluggish
    16 Jun 2014, 03:43 PM Reply Like
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