The financial sector has been consistently resilient through the last few years. The whole industry has been facing headwinds caused by lower reinvestment rates, the European sovereign crisis and an enhanced regulatory and tax system with a double dip recession. However, with an ongoing recovery in the housing market and companies’ earnings showing momentum, the economy as a whole is helping the banking system recover. In this article I am analyzing three of the country’s leading consumer, commercial and investment banking franchises.
I would buy this banking stock
Citigroup Inc. (NYSE:C) operates in more than 140 countries and territories around the world and is one of the Big Four Banks in the United States, along with Bank of America Corp (NYSE:BAC), JPMorgan Chase & Co. (NYSE:JPM) and Wells Fargo & Co (NYSE:WFC). My confident Buy rating on C is driven by an ongoing efficiency enhancement from improvement in credit quality, core revenues and strengthening capital ratios. In compliance with Basel III, management is on track to reach its target of greater than 10% Tier 1 common ratio by the end of this year, as it has increased from 7.2% to 9.3 YoY. Core capital generation increased from $4.6 billion to $6.3 billion.
Top reasons for my current Buy rating are:
• C’s operating margin currently at 11.3% is still far from its maximum of 35.2%, so I would expect it to continue raising up to 20%.
• C’s cash to debt is currently 0.48, very close to its 10-year maximum of 0.49, keeping in mind that the historical minimum has been 0.17.
• ROE was 4.2% in 2012, and it is estimated to be 7.1% this year and to get to 8.1% next year; ROA has been 0.42% for the year 2012 and is estimated at 0.79% for this year, increasing to 0.92% for 2014.
• Total revenues are expected to increase 15% YoY to $80.710 billion this year and to increase 7% YoY to $86.156 billion next year.
• C’s P/B of 0.8x is ranked higher than 64% of the 872 companies in the industry and is close to its 10-year minimum of 0.09.
I would expect this company to perform hand in hand with the market
U.S. Bancorp (NYSE:USB) is the fifth largest commercial bank in the US, and fourth largest by branches. USB is a worthy way for investors to diversify their portfolio through the next phase of the recovery. My recommendation is to stay neutral, and this is based on a 1.1% decline in revenues in 2013 YoY. However, estimated ROE for year 2013 is 21% and USB implemented share buybacks last quarter that represented 42% of the returned earnings to shareholders.
Some facts about the bank:
• Basel III Tier 1 common ratio increased to 8.2% (management’s target is 8%).
• USB’s net margin at 28.1 is ranked higher than 77% of the 915 companies in the US industry (median 17.80).
• ROA will stay close to last years’ at 1.6%, and ROCE is estimated to decrease to 20.3% from 22.2%. Management emphasized that in the face of slowing revenue momentum, it plans to keep expenses in check with the efficiency ratio likely to stay in the low 50s.
