Jim Sinegal, an analyst at the independent research firm Morningstar Inc., in Chicago, talked with Bank Director magazine Managing Editor Naomi Snyder in March about the recovery in bank stocks and why he likes Wells Fargo & Co., Capital One Financial Corp. and FirstMerit Corp.
There has been a huge recovery in big bank stocks in the last six months or so. How long can we expect this to last?
I think we could see a pullback. The market has gone up a lot. I wouldn’t be surprised if most of the gains are here to stay, though. The banks are in really a good position to deal with another downturn. They really have high capital levels. Earnings power has recovered. It is hard to see people getting as pessimistic as they were a year or two ago.
In November, you said the big banks were a good deal because they were trading at less than 10 times earnings, and you expected revenues to go up and expenses to come down. Their stock prices have since gone up a good deal. What do you think about that prediction?
I do think a lot of these banks were trying to cut expenses for a few years now and it will get tougher going forward. JPMorgan [Chase & Co.] recently announced additional layoffs and that’s something they are still trying to do. But we could see revenues rebound even faster than we expected.
I have heard that investors treat all the big banks the same, based on how they feel about the economy, rather than what’s happening at the individual banks. Do you agree, and do you see that changing?
I think there is a little bit of that. The banks that have had less trouble [after the financial crisis], JPMorgan and Wells Fargo, haven’t done as well [with their stock prices lately] as the banks that had trouble. The high-quality banks that didn’t have a lot of problems to fix were trading based on the economy. Bank of America Corp. and Citigroup Inc. had a lot of problems to fix so that’s one of the reasons they have performed so well. There could be a little more upside, but I would be surprised to see them rally too much.
What is your favorite stock and why?
Of the big four banks, I think we like Wells Fargo the best. It’s still the most traditional bank. It is majority funded by deposits and they have an excellent deposit base. They have funded themselves about 20 percent cheaper than their peers. Further down in size, we like [McLean, Virginia-based] Capital One Financial Corp. and [Akron, Ohio-based] FirstMerit Corp.
Capital One is a half-bank, half-credit card lender. It has really expanded so that it’s as much a bank as anything. Its reputation might have been tarnished by its past as being somewhat into subprime lending [with its credit card business]. We think it’s one of the more undervalued stocks that we cover. It’s the same story with FirstMerit. It bought Citizens Republic Bancorp [in Flint, Michigan], which had been troubled and turned itself around a lot. I think people hadn’t realized the extent that bank had improved. No one likes the Michigan economy. It’s easy to see why investors didn’t like it. The whole Midwest is the rust belt. But we think [FirstMerit is] doing a pretty good job expanding.