There’s no better time than now to buy into US banks. Here’s why

The Bank of Singapore (BoS), a subsidiary of Oversea-Chinese Banking Corporation (OCBC), remain "overweight" on the US financial sector due to the potential de-regulation for US banks as well as their prospects for higher-than-expected rates.

In a fully-valued and sideway market, it continues to advocate for investors to employ a rotation strategy - namely rebalancing out of overvalued sectors like technology, and rotating into undervalued sectors such as US financials.

"We think the markets are underpricing inflation and the Fed's hiking cycle. If inflation expectations were to increase and the Fed to raise rates according to its plans, the financial sector could benefit from it," comments BoS investment strategist James Cheo in a Friday report (30 June).

This comes after the US Federal Reserve's release of its Dodd-Frank Act Stress Test 2017 results, which suggest that banks are now have stronger capital positions and better risk management, and therefore more likely to have higher dividend payout and more share repurchases.

For the first time, the Fed has also waved through the capital distribution plans of all the major banks that it has tested, giving the green light to a record level of post-crisis distributions - share buybacks and dividends.

Cheo believes the favourable stress test results reinforces the bank's positive view on the financial sector, and recommends Capital One Financial Corp as well as Wells Fargo & Co as his top "buy" picks among the US banking sector, with fair values of US$102 and US$67, respectively.

"The reasons behind the Fed's sanguine outlook is because US banks have substantially increased their capital since the first stress tests in 2009. The common equity capital ratio - which compares high-quality capital to risk-weighted assets - of the 34 banks has more than doubled from 5.5% in the first quarter of 2009 to 12.5% in the first quarter of 2017," explains the strategist.

"This reflects an increase of more than US$750 billion ($1 trillion) in common equity capital to a total of US$1.25 trillion now."

Further, Cheo believes that the Fed makes its stress test "less onerous", judging from how it dropped its qualitative part of the test in recent years for smaller US lenders and several foreign groups.

"In the past, Fed has urged the banks to build capital and to improve the way banks monitor risks. Even if they passed the test, banks were often issued with long lists of 'matters requiring attention'. Now, it appears that the Fed is becoming more comfortable with the ways banks manage their risk," he observes.

Noting that the 34 US banks tested were, in aggregate, projected to pay out close to 100% of net earnings over the next four quarters compared to 65% last year, Cheo says banks such as JPMorgan will be returning more capital than they are generating, while many of the rest will be radically lifting payouts from previous levels.

Citigroup, for instance, was recently cleared to return US$18.9 billion to shareholders, which represents an 82% increase from the year before.

"Ever since the financial crisis, shareholders of banks had to live with a pare-back payout as the Federal Reserve wanted the banks to rebuild its capital positions. With the improved capital positions and better risk management, US banks are now able to give higher payouts either in dividends or share buy backs," concludes Cheo.


Source :
1) TheEdge Singapore, 3rd July 2017.

Capital One Financial Corp (NYSE : COF) - Case Study

The following day after the US Election 2016, the share price broke its S-Trader Trend Tracker resistance level and rallied for a month reaching a high of USD91.38 on 8 December 2016. Thereafter, the share price traded side way.

Daily chart of Capital One Financial.

Once again the share price break out its side way range and overcame its S-Trader Trend Tracker resistance on 15 Feb 2017, it rallied to a new High of USD96.92 on 1 March 2017.

Notice that the breakout action, the amount of volume activity as compare to the rally the day after US election 2016 recorded quite a low participation. This indicates potential weakness behinds the rally.

It doesn't take long to wait to see the true picture.

The share price starts to slide following the next day (2 March 2017) and broke the S-Trader Trend Tracker Support level on 17 March 2017 with closing price of USD88.23.

Check out the previous post in my blog on the recent events (included quarter earning report). Q1 2017 Earnings Fall as Charge-Offs Increase

Interestingly, the share price slides before the news on quarter earning report and branches closure, as mentioned in the previous post, been released to the public.


Source :
1) Metastock

Capital One Financial Corp (NYSE : COF) - Q1 2017 Earnings Fall as Charge-Offs Increase

On 25 April, Capital One Financial Corp. reported a 20% drop in Q1 net income from a year earlier as losses jumped for U.S. credit cards and the bank took a bigger provision charge for credit losses.

The firm, known for its big presence in the subprime credit-card market, reported net income of $810 million for the Q1, or earnings per share of %1.54. Excluding an item pertaining to a U.K. insurance customer refund reserve, the bank reported net profit of $910 million and earnings per share of %1.75.

The bank, often looked a by analysts as a gauge of consumers' ability to pay back their debts, reported that domestic credit-card net charge-offs reached 5.14% in the Q1. That was up from 4.16% a year prior. The company wide provision for credit losses jumped 30% from a year earlier to $1.9 billion.
 
For more details, click below link :
Capital One Earnings Fall as Charge-Offs Increase 

Prior to the Q1 earnings release, Capital One Bank, in a cost-cutting measure, is closing its Rio Grande Valley branches in June  and will rely instead on online banking and ATMs in the region as reported by Valley Morning Star on 23 March.

A spokesperson for the nation's eighth-largest bank holding company said that the decision was based on cost and changing consumer habits.

More details, click below link :
Capital One closing branches in Valley 

Few days later, on 31 March, a local website reported that Capital One is closing its seven San Antonio-area branches in June as part of an ongoing consolidation of its banking network.

The branch closings follow an industry trend as more customers use institutions' mobile apps and websites to conduct financial transactions.
 
Click below link for details :
Capital One closing San Antonio-area branches 

In the upcoming post. we shall look at the company price chart reaction towards these events.

 
Source :
1) www.mysanantonio.com
2) www.foxbusiness.com
3) Dow Jones Newswires
4) www.wsj.com
5) www.valleymorningstar.com