Multinational Large Cap Banks Continue to Face Regulatory and Economic Issues: A Wall Street Transcript Interview with Todd Hagerman, Senior Research Analyst for Sterne Agee & Leach

Wall Street Transcript

67 WALL STREET, New York - May 2, 2014 - The Wall Street Transcript has just published its Money Center Banks Report offering a timely review of the sector to serious investors and industry executives. This special feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Investing in Financial Services - Regulatory Outlook Gains Clarity - Investing in Regional Banks - Interest Rates and Loan-Growth Strategies - Challenging Revenue Environment - Fed Capital Review Program - Opportunities in Larger Banks

Companies include: Citigroup, Inc. (C), JPMorgan Chase & Co. (JPM), Bank of America Corporation (BAC), Zions Bancorp. (ZION), Goldman Sachs Group Inc. (GS), M&T Bank Corp. (MTB), Hudson City Bancorp, Inc. (HCBK), PacWest Bancorp (PACW) and many others.

In the following excerpt from the Money Center Banks Report, an expert analyst discusses the outlook for the sector for investors:

TWST: Can you begin with a brief introduction to your coverage, including some of the specific names you follow?

Mr. Hagerman: Basically my coverage universe captures the top 25 banking companies in the U.S., from some of the largest global companies including Citigroup (C), JPMorgan (JPM) and Bank of America (BAC), as well as a number of the super-regional banks, and it trickles all the way down to some of the smaller-cap banks, particularly out West. And recently I picked up coverage of the Puerto Rico banks, which is unique unto itself. So that's kind of the coverage universe, basically the top 25 banks including the large broker/dealers as well as a few of the smaller-cap names out West and the Puerto Rico banks.

TWST: You recently downgraded Citigroup to "neutral." Tell us about the factors that contributed to that ratings change.

Mr. Hagerman: A couple of different things. Number one, expectations were pretty high going into the Federal Reserve's annual capital review program, in which Citigroup had been quite conservative as it relates to distributing capital to shareholders to this point. So expectations were high that with the capital levels of Citigroup ranking among the highest in the industry that the capital return would increase pretty materially going into 2014 and the first quarter of 2015.

Unfortunately, the Fed failed them on the qualitative factors of their capital planning, so the planned capital return of roughly $6.5 billion didn't quite come to pass. In light of that, you have a number of different events that have been taking place at the company, including a recent fraud discovery at their Mexico unit of roughly $400 million. And just recently there have been a number of other investigations opened into the company, including those by the Department of Justice as well as the New York U.S. Attorney General, among others.

So as I stepped back and took a look at Citigroup, they failed their capital test now two of the last three years. They are on their second CEO, and quite frankly the concern is increasing as it relates to the company's regulatory and compliance risk. If you think about their global operations, with roughly 60% of their revenues coming from outside the United States, there is this fair amount of risk in those operations in part cited by the Federal Reserve and their rationale for failing the company in terms of its capital plan. So it's my position that both the regulatory risk as well as the legal and other compliance-related risks are increasing quite dramatically for the company at this time...

For more of this interview and many others visit the Wall Street Transcript - a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs, portfolio managers and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

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