Bank of America and Citigroup “Coming Out of the Blue”!

It’s been eight years…almost nine!

But something remarkable happened on election night in the financial markets. America’s two biggest money-center banks, representing $4 trillion in assets, both had a positive transit of EBV-3.

And have continued to rally.

Before we get to our Model Price charts, let me set the table with this one chart produced by RBC Capital Markets showing how little, in comparison to deposits, the commercial banks in America have been lending relative to the cheap funding of their deposit base.

voila_capture-2016-11-14_04-58-16_pm

America has been starved of credit. One has to go back to the 1970s, and in the recession of the 70’s to see how little the banks are lending into the US economy. I guess all owe a debt of gratitude to the US Federal Reserve for being historically so accommodative that this lack of lending didn’t lead to the ‘Great Depression of 2008-16’.

Without credit, without bank lending economic expansion is truly impossible. You have to be impressed that US GDP has been crawling along at 1 to 2 percent especially without lending or credit creation. And don’t let me started on the US Federal Government ‘shutdown’ and budget sequester that stalled the US economy even further.

And think of what additional measures, along with dropping interest rates to generational lows, the US Federal Reserve has been doing over the last eight years; printing more than $4 trillion of money, in the form of Quantitative Easing (QE), and this money is just sitting around in excess reserves. That’s right, high-powered government created money just sitting around and not being lent out to a credit starved US economy. Yep, America’s biggest banks are happy collecting 0.25% from the US Fed instead of lending it out at higher rates.

Crazy situation. Some would call it a stalemate between business and government with the American population caught in the middle. Well, let’s just say the bottom 95 percent, the top 5 percent have been doing well thank you very much.

Until election night!

Let’s look at another couple of charts on what’s been going on.

First, here is a chart showing average compounded annual growth rate of the S&P 500 companies by industry from 2013 to 2016.

voila_capture-2016-11-07_10-27-08_am

I have highlighted the financials subgroup and their rate of annual compounded growth over the last three years. As you can see ‘Financials’ have CONTRACTED growth of a negative 2.7%. If your financials, as a group, are not growing FUNDAMENTALLY, your economy is not growing.

This needs to change!

This is also an interesting chart showing what bank stocks have done after an election of first-term presidents since 1928…and the Trump rally has been the largest going back almost 90 years.

voila_capture-2016-11-21_11-11-55_am

I think something is going on here…

Model Price Charts

Bank of America

bac-us4

Here is the weekly price bar chart of the positive transit of EBV-3 or as we call it, “Coming Out of the Blue.” This chart is from our ‘Model Price’ app tool on Facebook.

A positive transit of EBV-3 is significant to Model Price Theory (MPT) because the market is communicating that the balance sheet of the company has value or better still the stated audited value of the assets of the company are not impaired. This is real-time, this is objective and black and white. Actionable.

Not only did BAC-us have a positive transit of EBV-3 but also a positive transit of EBV-2 in the first week of December and as the below Model Price (MP) shows a valuation high for the last 8 years!

bac-1-us2

The All-Important Leverage Ratio

Banks are different beasts compared to an ordinary operating companies and it’s amazing that MPT is so accommodative to value both financial institutions and ordinary companies in terms of our Economic Book Value and Model Price calculations.

Another simple metric to valuating banks and financial institutions is looking at the ratio of assets to capital. Currently, Bank of America has a leverage of assets to capital of 8.13 times that is certainly the lowest this ratio has been looking back to 2000. The highest this ratio has been in 15.35 back in 2003 and going into the financial crisis of 2007 this ratio was a low and reasonable 11.69. This helped BAC not only survive the Great Financial Crisis (GFC) but helped common shareholders not lose as much as other big money center banks.

If Bank of America can grow this leverage…from the current 8.13 times to even 10 or higher this will not only increase earnings for this bank but also inject much needed credit into the US economy.

Citigroup

Model Price Chart

c-us5

Here is the weekly chart of the positive transit of EBV-3 or as we call it, “Coming Out of the Blue.”

Again, this is significant.

This money center bank was ‘rocked’ in the GFC. Back in 2000 and 2007 this bank was trading over $600 a share!

And as you can see from our long-term MP chart since 2008 the stock price hasn’t been a ‘barn burner.’

C-1.US2.png

Looking at the leverage, the ratio of assets versus capital, Citigroup currently has a ratio of 7.85 times. In 2007, Citi’s ratio going into the financial crisis was 19.21x! So you can see why this huge financial had such a hard time during the GFC.

Like Bank of America if Citigroup can grow this leverage…

And by the way, Canada’s own Royal Bank, which many believe is one of the best managed bank in the world, has an asset leverage of 17x!

Potential Dividend Increases

This is big. And I think everyone is missing this…

Certainly over the last three or so years, the Federal Reserve has had final say on whether banks, especially ‘Too Big To Fail’ (TBTF) banks – like Citi and B of A can increase their dividends. And the US Fed has been saying, “NO”!

Bank of America will pay out a puny 30 cents a share this year, yielding investors 1.30% at current prices. Citi will pay out 64 cents, netting investors 1%. Back in 2007 Bank of America was paying out $2.40 a share and Citi a huge $21.60!

Yes, I agree we are not going back to 2007, in terms of dividend payouts anytime soon but with historic low levels of leverage, assets versus capital, and a big change in the political landscape, regulators – such as the US Fed – will perhaps look at dividend payouts differently when Mr. Trump is in the White House.

Conclusion

Since election night, over a month ago, US financials have been on a tear and probably with good reason. If the US economy is going to grow, credit creation must be apart of the solution. With Mr. Trump’s election the market is anticipating that big changes are in the offing for the financial sector. With some very simple revisions to the Dodd Frank Bill, the largest financials, the money-center banks, will be able to extend credit, increase leverage resulting in substantial increases of earnings and dividends.

The banks are like the sun in a capitalist solar system. Without them, there is no growth, no capitalism. If Mr. Trump’s administration can stop the repression/persecution of this industry, trillions could be released to a credit starved country and economic growth will soar.

The market is already anticipating this, hopefully it won’t be disappointed!

One response to “Bank of America and Citigroup “Coming Out of the Blue”!

  1. cobbiangrant December 11, 2016 at 5:31 pm

    Time to jump in with both feet in the S&P and the TSX….?

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