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Bank stocks: Why investors should buy the dip, according to a strategist

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  • BAC
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RBC Capital Markets Head of U.S. Bank Equity Strategy Gerard Cassidy joins Yahoo Finance Live’s Zack Guzman and Akiko Fujita to discuss fourth quarter bank earnings and the Fed funds rate.

Video Transcript

ZACK GUZMAN: Welcome back to 'Yahoo Finance Live' as we continue to watch the market sell-off accelerate a bit. The Dow off more than 300 points here, getting dragged down by some of the big earnings news we got when it comes to the big banks there. I want to highlight the action we're seeing play out among those names.

JPMorgan right now off more than 5% despite the fact that they beat estimates on the earnings and revenue front but the look ahead, not necessarily delivering any confidence there as JPMorgan's Jamie Dimon is highlighting some more inflationary pressures that could bring some weaker performance issues later on in the year. Of course, you see some of the other names there, Citigroup as well in the red. Wells Fargo, rare standout here, up 3%, one of the only ones in the green in that space.

And for more on what we did learn, I want to bring on Gerard Cassidy, RBC Capital Markets head of US bank equity strategy and large-cap bank analyst here with us. And Gerard, I mean, when we're looking at it, obviously, you know, the big banks are what people look for, for kind of the sentiment around earnings. When you dig into the numbers though what did you make of what we heard? I guess we can start with JPMorgan just because that's the big one a lot of focus is on right now. What did you see there?

GERARD CASSIDY: Sure. The actual quarterly numbers for all these banks, including JPMorgan were actually quite good. But it's really the outlook is what people are concerned about, particularly JPMorgan highlighted that the operating expenses for the company were probably going to come in around $77 billion in 2022. And that was against our estimate of about $72 billion, and I believe we were around consensus for that number.

Now, they also highlighted though that the revenue, net interest revenue, which is the revenue generated between what they earn on their assets less their funding costs, they also guided that up though 10%. So that was also a positive guide. But the focus has been on these expenses. And the expense growth that they talked about is driven by two things, first, compensation and salaries, and second technology spending.

So I think that's what the market is focused in on in the trading today, is their guidance on expenses. Whereas Wells Fargo, which you highlighted as being one of the few stocks that's up today, they've been on a cost-savings program ever since their new CEO, Charlie Scharf came on board back just over two years ago. And so their expense numbers and their guidance was much more favorable than JPMorgan's. And I think that's really accounting for the difference in the way their stocks are performing today.

AKIKO FUJITA: Yeah, Gerard, how do you think we should be looking at that competing dynamic? On the one hand, you're talking about expenses going up, wage pressures going up, and yet we've heard from many guests on our show who've said financials are the place to be because as interest rates rise, net interest margins rise.

GERARD CASSIDY: And I would agree with that, that's where we want to be is in the banks because there's optionality to the upside on revenues. Expenses are fairly well known for the banks. So when they give guidance, there's not too much of a variable when it comes to those expenses. But when it comes to revenues they have to make some assumptions about where interest rates will be and where loan demand will be. And so when we look at the outlook for Fed fund rate increases, if they come in higher than expected that will benefit the banks, of course.

In addition to that, when the Fed fund rate increases come in, assuming they do, and we're sitting here, let's say in the third-quarter results in October and we've already had let's assume for a moment three Fed funds rate increases, there probably will be talk of further Fed fund rate increases, which will benefit the banks even more. So I think that's why you still want to own the banks, days like today is when you want to buy on dips, because the outlook for rates is favorable and also the loan demand numbers, and we saw this from JPMorgan as well, is loan growth is starting to accelerate not just in consumer, but in commercial lending as well.

ZACK GUZMAN: Yeah, bear with me in kind of pairing these dots, but I guess the story does matter, right, when we talk about kind of the drivers. And I'm thinking about Disney and the drivers there, we're kind of all streaming, and then now as we kind of shift over to reopening and now the parks business can be the thing, the big banks, we talk so long about kind of issues around what's going to happen with lending and the consumer side in the pandemic, and really it was kind of the trading and other activities that we saw come through and some big deals kind of on that side helping them weather the storm. We'll use one example here in the green though I mean, it's a punching bag all the time, but Wells Fargo up today as they beat earnings too. I mean, as you kind of look at some of those strengths as you see it with yields rising, which one of these you think is best positioned to kind of deliver on the upside there as the story shifts among the big banks?

GERARD CASSIDY: No, no, you said it well. And it's the diversity of the revenues that the big banks have. And JPMorgan even highlighted that on their call about the investment banking strength during the pandemic more than offset some of the weaknesses in loan growth. But in terms of asset sensitivity, which is a measure of who benefits the most from rising short-term interest rates, Wells Fargo is clearly the top of the list.

And it's somewhat ironic that this cease and desist order that they were given in '18, which froze their balance sheet, has made them actually more asset sensitive because they can't grow the balance sheet to grow revenues but they can make it more asset sensitive and they've done that. And so the asset sensitivity now is working in their favor and that showed up today as their guidance too was for greater revenue growth, net interest revenue growth about 8% in 2022, which was higher than expectations, which is a contributor to why the stock is doing well today.

AKIKO FUJITA: Gerard, Citigroup another one of those stocks that is seeing some downside in the session today. We've seen the bank under Jane Fraser really try to reduce its consumer operations globally, more shuttering happening in 14 different countries. And I wonder on the other side of it what that repositioning looks like? How do you view that stock?

GERARD CASSIDY: That's a very good way of presenting the story for Citigroup. They're going through a transition, it's a refresh as they like to call it, a strategy refresh. It's going to take time, it's turning around a aircraft carrier and not a speedboat. And so it's going to take time for the full benefits of what the actions that under Jane Fraser's leadership have already started that she has taken.

For example, last night they announced the sale of their Asian businesses that they were planning to exit. The surprise this week also was the exiting of the Mexican consumer banking businesses. And so what the company is doing is trying to simplify the business lines, have economies of scale in the business lines that they're going to compete in. And those economies of scale will deliver higher levels of profitability.

And then any excess capital that is created by slimming down the size of the company will be given back to shareholders through increased buybacks. Which makes a lot of sense when the stock is trading at such a discount to book. So we have investors that are looking out onto the other side, at these price levels Citigroup is very attractively priced and should be purchased.

ZACK GUZMAN: All right, RBC Capital Markets head of US bank equity strategy, Gerard Cassidy there helping us break it all down. Appreciate you taking the time, sir. Be well.