Clerical Medical is favouring US banks with limited domestic exposure including those with investmen...
Clerical Medical is favouring US banks with limited domestic exposure including those with investment banking operations and regional banks with defensive characteristics.
The US regional banks have been underperforming over the past 12 months with the market pricing in an economic downturn. The S&P Major Regional Banks index is down by 21.79% in dollar terms in the 12 months to 14 February compared with an 11.92% rise in the S&P 500 over the same time period.
James McLellan, US fund manager at Clerical Medical, is positive on the banking sector and holds banks including Mellon Financial which is on a P/E of 17.32 times and saw its share price fall by 5.66% in the period between 12 February 1999 and 14 February 2000. McLellan also holds Wells Fargo which saw its shares rise by 10.99% in the 12 months to 14 February. The stock is on a P/E of 17.29 times.
McLellan says: "Wells Fargo is a domestic regional bank and it has an aggressive internet strategy in place which is far ahead of most of the other banks. We favour Mellon Bank as it has very high fee income as it is involved in a lot of asset management and custodian activity. Because of this it is better insulated from any downturn than the other banks."
McLellan also holds Chase Manhattan which is involved in activities including investment banking. He adds that the firm has limited exposure to the US economy and that it is well diversified. Chase Manhattan has been building its position in the fixed interest market and is now in the top five in the US in terms of bringing debt to the market. Chase Manhattan is on a P/E of 13.26 times and saw its share price rise by 6.75% in the period between 12 February 1999 and 14 February 2000.
Grant Wilson, US fund manager at Martin Currie, also holds Chase Manhattan as it is a well diversified business but is negative on the banking sector overall. He says: "The basic outlook is that interest rates are going up in the US - as banks are interest rate sensitive that is bad. Also, despite the fact that the US population is greying, which should be good for financial services companies, the banks are losing market share to dot.com companies and other financial services companies. Instead of having a deposit account, many people are holding money market mutual funds and instead of having an overdraft they will have a credit card. We do not like the mainstream banking sector at all."
McLellan is also keen on Citigroup which is beginning to see benefits coming through from its merger with insurance firm Travelers, which was unveiled two years ago. Citigroup saw its shares rise by 52.53% in the period between 12 February 1999 and 14 February 2000 and the stock is on a P/E of 18.93 times. McLellan says: "Travelers' insurance products are starting to be sold into the banking network and Citigroup is executing its strategy very well.
"The market has been rewarding it and it is well insulated from any potential downturn. We are also overweight American Express and are happy to be so. It is not overly exposed to the US economy and has been executing its business well. The growth it has been showing in terms of earnings and revenue has been very strong and very convincing."
American Express shares saw a rise of 53.81% in the 12 months to 14 February and the stock is on a P/E of 28.32 times.
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