US banking companies performed in line or ahead of expectations in the second quarter reporting seas...
US banking companies performed in line or ahead of expectations in the second quarter reporting season.
Alison Sinclair, investment manager at Britannic Asset Management, believes the recovery in the stock market drove much of the growth in market-sensitive companies, those with asset management or brokerage firms, leading them to deliver better than expected results. Examples of such companies include Mellon Group, Bank of America and Citigroup, she says.
It has been more difficult for the pure banks that rely on lending to grow their business, however, as these are suffering a margin squeeze due to low interest rates. Sinclair says: 'It was not as bad as some people expected but the low interest rates did have an impact. It is necessary to get loan growth from these banks.
'Consumer loan growth is strong but we need commercial loan growth and that has not kicked in yet. For this to pick up, we need economic recovery.'
Such views are reflected in Britannic's US portfolio, which is underweight pure banking stocks and overweight diversified financials such as insurance companies and asset managers.
'We are focusing on banks with market sensitivity such as Citibank and Bank of America,' Sinclair says.
However, she is not totally out of mainstream banks as she also holds Wells Fargo and US Bank Corp.
'These are not market sensitive but we feel they still have good growth prospects,' she says. 'The reason we are underweight overall is that on a stock-by-stock basis, many of the regional banks are fairly fully valued at the moment.'
The banks are trading on P/E ratios of around 12 times earnings. Although this sector generally trades at a discount to the broader market, this is at the mid to higher end of the historic range, Sinclair notes.
Simon Laing, US fund manager at Newton, is neutral on the banking sector, focusing primarily on mid caps and underweighting larger companies.
Among large-cap stocks, he does not hold Bank of America or Wachovia, although he does own Citigroup, Wells Fargo and Merrill Lynch. 'Meanwhile we are overweight in mid-cap stocks, such as Zions and City National,' he says.
Laing believes revenue growth is likely to be a problem going forward and select mid-cap stocks are better poised to grow their market share.
'One of the things larger banks have cut back on is service,' he says. 'They have closed a lot of their branches and tried to put it all on the internet. But some customers want that service, or want someone to take care of them, and companies like City National, based in California, are gaining market share because of the added service they can lay on.'
The current neutral position at Newton reflects a trimming back from a previously overweight stance. Laing reduced this position in anticipation of fierce pressure on margins in the coming year.
This is likely to be the case with margins on lending due to low interest rates and falling refinancing volumes.
Laing says to be bullish on banks, a commercial lending pick up would be necessary, which is unlikely to happen.
Consumer lending is high.
Market sensitive companies doing well.
Strong dividend growth.
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