A Wall Street Transcript Interview with Chris Kotowski, Managing Director and Senior Research Analyst at Oppenheimer & Co. Covering Large-Cap Banks and Brokers: Yield Curve and Bank Profits

Wall Street Transcript

67 WALL STREET, New York - May 1, 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: 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 Money Center Banks Report, an expert analyst with over 30 years of bank stock experience discusses the outlook for the sector for investors:

TWST: What are your thoughts on the relationship, or lack thereof, among rates, the yield curve, bank revenues and margins, and the performance of bank stocks?

Mr. Kotowski: Well, if you look at it historically, what you'd find is that there are no easy correlations between all those things, and that you can find counter examples for every generalization that people make that steep yield curves are good for banks or that rising or falling rates are good for banks. You can find plenty of counter examples for all those, and what I've found is that over time nothing really correlates. So I think you can basically take all those rules that you have been told by various people and you can throw them out of the window. I do think in this current rate cycle, however, there is every reason to be optimistic that once rates do start trending up that the banks will be very asset-sensitive and that there will be positions to benefit from that.

TWST: How should bank investors be positioning themselves for the coming rate cycle?

Mr. Kotowski: I think in general bank stocks will continue to outperform the market. Last year bank stocks outperformed by 3% or 4%. So far year to date they've performed by about 3%. And so we would, in general, be still modestly overweighted bank stocks relative to the market. I'll have to say quite honestly, the market doesn't look cheap to me, and bank stocks in isolation don't look cheap to me, but relative to the market I still think they look cheap.

TWST: You talked to us in 2011, and at that time you were very positive on your group. Are you as, more or less, positive at this stage?

Mr. Kotowski: Yes, and it's really valuation. I mean, 2011 was really a historic buying opportunity, and because things had been getting better steadily since 2010 - month-in, month-out things were getting better; delinquencies and foreclosures were going down. And that continues to be the case. We continue to make progress from the housing crisis, but the stocks, in general they are no longer giving the stocks away like they were back in 2011.

TWST: So what's the level of investor interest in the group right now, and is investor sentiment in line with your view or does it diverge?

Mr. Kotowski: I still think there is a pervasive distress to the financial stocks and in particular of the bigger ones. So we have a concentration of recommendations in the bigger ones like JPMorgan (JPM) and Citi (C). I also like the credit card companies like Capital One (COF) and Discover (DFS). So I still think investors are distrustful, and that's good. That's what creates the opportunity in the stock.

TWST: Trading revenues were down in Q1 for the 13th time in the last 17 quarters. Why is that, and how does it impact your view on the sector?

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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