Tuesday, 14 July 2015

What the average fund manager thinks...(part 2)

In part 1 (link here) I made some macro observations about today's BoA-ML fund manager survey. In part 2 I am going to look at a sector bias with some real relevance today. As Fast FT notes here 

Investors are more optimistic about banks than they have been for over a decade as expectations about a US Federal Reserve rate hike lift the banking sector.

Looking at a graphic from the document you see what they mean: 

Kind of interesting given banks are generally quite geared towards the economy and confidence globally has abated a little recently...

A good test is happening this week with a plethora of banks (and other financial companies) reporting this week: spot in the graphic below Wells Fargo, JP Morgan, Bank of America, Blackrock, Goldman Sachs, Citigroup, Charles Schwab...and many others.  

So what about today's offerings from Wells Fargo and JP Morgan?  Well both stocks are slightly up as I write. JPM reported first and for me the key graphic from their presentation was undoubtedly this one:

What did I particularly note?  Core loans up 12% year-on-year and an annualised run rate of over US$10bn in shareholder remuneration.  That's around a 4% equivalent which is not too shabby at all. 

Key return measurements like return on equity/return on tangible equity were unchanged and running through a theoretical fair valuation this has increased a little to around US$64.50 (using an akin methodology to a quarter ago).  So at today's share price...there's a touch too much optimism for me priced in (the nearer US$60 the better):

Undoubtedly not the first time I have struggled to find value in a key constituent of a global sector consensus long...

So how about Wells Fargo? Loan growth was not as strong as at JPM above and the capital position not quite as strong - although the Wells Fargo business has massively fewer 'fat tail' investment banking and related capital markets exposures.  Nevertheless the lack of progress on the net income line is also noteworthy: 
Usefully Wells Fargo also notes the amount of its total shareholder remuneration during the last quarter.  Annualising this up gives an approximate remuneration yield of 3.9% interestingly very akin to the figure generated for JPM and noted above. 

With return on equity slightly dipping during the last quarter to just under 13% using a methodology akin to last quarter (link here) still gives a fair value in the mid US$40s. So not a share for me at the moment.  

There are financial shares I like but at prevailing neither JPM or Wells Fargo are on my personal buy or holding list.  

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