Anthony Polini is a managing director at Raymond James & Associates in New York and covers big and regional banks, such as JPMorgan Chase & Co., Citigroup Inc. and Hudson City Bancorp. This is a longer version of an interview that appeared in the fourth quarter issue of Bank Director magazine, where Polini talks about the cyclical nature of bank stocks and why they are a good investment right now given the country’s slow recovery.
What is your outlook for bank stocks?
You tell me the results of the presidential election, what interest rates are going to be by the end of the year and I’ll tell you what will happen with bank stocks. I personally think a Republican victory [in the presidential election] would be better for bank stocks and the stock market in general. The one caveat is interest rates. There is a point where you keep rates so low for so long, even if you have growth, the incremental yield comes down, which is a headwind for earnings growth.
One thing you have to realize is that bank stocks are cyclical. For many years, bank stocks were viewed as interest rate plays but in reality, they are very cyclical. A positive comment from the Federal Reserve [chairman Ben Bernanke] could send stocks up 5 percent. Increased concern about Spanish debt could mean Citigroup, JPMorgan and Bank of America lead the market lower. If the news is generating a negative outlook, the banks are going to move down.
Given the fact the bank stocks are cyclical, is this a good time for investors to buy them?
You want to load up on bank stocks in the middle of a recession. Sometimes you are in a recession for several quarters before you [determine] when the recession began. You want to overweight banks from the latter stages of a recession to the mid-stages of a recovery. One of the problems with this recovery is we are in the early stages of a recovery. It is slow. The economy is on two or three cylinders, not eight cylinders.
So you think investors should be sure to have bank stocks in their portfolio? What are your favorite picks?
Yes. You have some that are super, high-quality names and have high dividends. Those banks tend to lag [the rest of bank stocks] on positive days. A top pick in that category has been [the $43.5-billion asset] New York Community Bancorp. NYB is the ticker symbol. We have it rated a strong buy. It has a dividend yield of 7.5 percent and trades slightly above book value. It’s at a relatively safe valuation to play the sector and pick up a high dividend yield.
The mega-cap banks clearly have the most attractive valuations. They also have more risk related to the global economic outlook. They probably have more volatility than the small- to mid-cap banks. In general, the more defensive names tend to be the smaller banks with less global exposure.
We’ve had very few M&A deals lately. But two of the banks you cover are merging in one of the biggest deals all year. M&T Bank Corp. is buying Hudson City Bancorp. What’s your take on that deal?
I think Hudson City was on everybody’s list as a likely seller this year. The chief executive officer recently had some health issues. It is a quality franchise but the business model—leveraging up debt, sticking to residential mortgages—[isn’t] as good as it used to be. I think they were under pressure to redefine themselves, which they started to do, and I think the decision to sell was probably a wise one. What M&T paid didn’t look exorbitant. [The deal value was $3.8 billion, or 85 percent price to tangible book value.] Another way to look at it is, it’s a very good deal for M&T. It’s not a huge deal but it’s a good deal for them. It was a good price. The only thing that didn’t make sense to me was the high cash component, [60 percent was stock and 40 percent was cash]. Both stocks have done well since the announcement. But if you are going to sell cheap without a bidding process, one would think you would take all stock.