A Wall Street Transcript Interview with Chris Kotowski, Managing Director and Senior Research Analyst at Oppenheimer & Co. Inc.: Hate the U.S. Mortgage Business? So Does this Banking Analyst

Wall Street Transcript

67 WALL STREET, New York - July 11, 2014 - The Wall Street Transcript has just published its Banking Review 2014 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: Banking Review 2014

Companies include: JPMorgan Chase & Co. (JPM), Citigroup, Inc. (C), Capital One Financial Corp. (COF), Discover Financial Services (DFS), Goldman Sachs Group Inc. (GS), Morgan Stanley (MS), Bank of America Corporation (BAC) and many others.

In the following excerpt from the Banking Review 2014 Report, an expert analyst discusses the outlook for the sector for investors:

TWST: What are some of the headwinds that you are watching for the group this year that we should we have on our radars?

Mr. Kotowski: Well, obviously mortgage banking revenues are under pressure, and basically I've always hated the mortgage business. The banks don't make a lot of money on it. Anyway, it's extremely volatile, low-margin; it's a dreadful business. And quite honestly, I wish the big banks were out of it. So the mortgage banking revenues have gone from close to $7 billion a quarter down to about $3.5 billion, and the good thing there I'd say is that we'll be anniversaried by the third quarter. This will have been the third quarter where it's down, so that headwind will even out a little bit.

And then in general loan growth still remains very sluggish, and I think one reason why is because with the higher capital ratios, the banks have no choice but to both tighten underwriting criteria and raise prices, and that's obviously choked off a lot of the growth. So for the time being I think banks are going to have to make their earnings targets in particular with expense control and with very low loan losses from very tight underwriting standards.

TWST: Which three stocks from your group are the best ways to get exposure to the sector at this point, and what is it that you like about each?

Mr. Kotowski: Yes, I would say, JPMorgan (JPM) and Citi (C); and after that, I cover Discover (DFS) with my colleague Ben Chittenden. He is the lead on it, but those are the three that I'd lead people to. JPMorgan I would say is a combination of quality and value. It is arguably the strongest big bank in the world. It has performed well through extreme adversity, and trading at one point for tangible book and by 10 times earnings, it's just way too cheap.

It has a much richer mix of business and a more robust mix of business than most regional banks, but on average the regional banks are probably trading between 1.8 and two times tangible book, and JPMorgan is only 1.4. And if you just do a regression line between return on tangible equity and price to book, if JPMorgan were in its rightful spot in terms of valuation on that regression line it would be closer to an $80 stock.

For Citibank...

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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