Buy Comerica, skip Bank of America: Good Buy or Goodbye

In this edition of Good Buy or Goodbye, Yahoo Finance Host Julie Hyman is joined by Unlimited Funds Co-Founder Bob Elliot to hear out his winners and losers in the banking sector.

Elliot puts a "Good Buy" rating on Comerica (CMA), highlighting the mid-sized lender for an attractive valuation, lower-risk balance sheet, and growth opportunities in key states like Texas and California. While Comerica felt ripples from earlier regional bank failures, Elliot says it is "positioned to take advantage of the weakness in some of the other banks."

Conversely, Elliot assigns a "Goodbye" call on industry titan Bank of America (BAC). He notes that despite also facing collateral damage from the regional banking crisis, BofA trades at a higher valuation while seeing margin compression and stagnating market share in core lending businesses.

Click here to see more "Good Buy or Goodbye" or you can watch this full episode of Yahoo Finance Live here.

Video Transcript

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JULIE HYMAN: It is a big, noisy universe of stocks out there. Welcome to Good Buy or Goodbye, brought to you by E*TRADE from Morgan Stanley. Our goal, to help cut through that noise, to navigate the best moves for your portfolio. Today's focus, the banks.

After the chaos caused by the collapse of Silicon Valley and other regional banks in the first part of the year, regional bank stocks collectively have recouped those losses. The conventional wisdom was that the big banks would be better positioned following that crisis. Today's guest is turning that on its head.

I'm here with Bob Elliot, CEO and CIO of Unlimited. Thanks so much for being here, Bob.

BOB ELLIOT: Thanks for having me.

JULIE HYMAN: So you actually like a regional bank stock. And you have a mega-cap bank stock that you don't like. So let's get to the regional bank stock. It is Comerica. And this is a regional that did get caught up. We can certainly see it on the chart. It got caught up in what was going on with SVB earlier in the year, had deposit outflows like many of its peers.

So you're looking at it now for a number of reasons. One of them is on a relative basis, you like the valuation of Comerica.

BOB ELLIOT: Well, I like the valuation a lot. You've got one of the regional banks that's trading, you know, at 6 PE, which is one of the lowest PEs amongst the regional banks. And the stock is still down, you know, 20% or 30% from pre-SVB conditions when you're seeing a real stabilization in the overall economics of the business.

So it's not clear that decline in the stock price makes a lot of sense, particularly in the context of some of the buoyancy we've seen in other stocks, which, of course, we'll get to a little later.

JULIE HYMAN: Why? And again, collectively, they've recovered. But Comerica, to your point, hasn't. Why has it been punished so much more than some of the others?

BOB ELLIOT: Well, I think one of the challenges is some of these smaller regional banks are in a difficult position to absorb a lot of this incremental cost around new regulatory frameworks and things like that. That is something that's hindered the stock operating as an independent. But given where it's positioned and where it is relative to all these other sort of smaller regionals, it actually may be a good opportunity for an acquisition from one of the bigger ones, particularly when we talk about its geography and its footprint and its, you know, growth into Texas and California high-growth markets.

JULIE HYMAN: All right. Put a pin in that. We're going to talk more about that in a minute. Let's talk about some of the other fundamentals of the business. Effectively, you're seeing it as having a lower risk balance sheet versus the rivals. And one of the things I was intrigued by that you brought us is its non-interest-bearing deposit accounts as a percentage of the total and how it compares to other banks.

This is Comerica. On the right here, we've got the likes of Zions Bank and some of the others going all the way down. I-- WBS, I don't know. Huntington, I know, HBAN, that one.

BOB ELLIOT: Exactly.

JULIE HYMAN: In any case, there-- these are deposits that they don't have to pay interest on.

BOB ELLIOT: Right, I mean, the sort of sweet spot of any smaller bank is traditional business transactions and customer deposits, people who are getting their paycheck deposited, businesses that are-- you know, small businesses that are running their day-to-day operations. Those are non-interest-bearing deposits. And the more that those have-- more that those banks have, the less that they have to pay on their deposit base.

And so you look across the range of different banks. And you see Comerica is actually very well positioned, even though on the margin, the non-interest-bearing deposits-- the interest-bearing deposits are a little bit higher when you've got, you know, almost half of your deposit base paying zero. You've got a lot of good sticky deposits that are there based on a relationship reason rather than looking for the highest yield that's out there in the market.

JULIE HYMAN: Right, and they're low cost too, obviously, as the bank. And then finally, there's the other point. You mentioned that it's growing in places like Texas and California.

BOB ELLIOT: Yeah, I mean, Comerica actually is my hometown bank. I'm from Detroit. I grew up in Comerica with accounts there. But in the time since I've left Detroit, it's moved its location, its headquarters to Texas, really banking the Texas boom that we're seeing that's going on.

And the other thing I think is interesting is it made inroads in California. It was actually pretty conservative in the California market relative to some banks that we've been a little more familiar with lately. And that's actually positioned it well. You know, it's got, for instance, one of the oldest venture lending businesses in the country. And it's stepping in where SVB and others are stepping out. And so it's really positioned to take advantage of the weakness in some of the other banks that are in the space.

JULIE HYMAN: So given all of that, what do you think is the biggest risk here? It's that maybe we see another hit to these small banks?

BOB ELLIOT: Well, I think it all comes down to whether we see a broad-based bank run. Now, I'm not-- I don't think that that's going to happen. And the Fed's made it pretty clear that they're going to do what it takes to ensure that the deposit base remains stable. And what you're seeing actually is deposits have grown since the SVB situation for most of the regional banks, even though they're still declining for the big banks.

So it doesn't look like we're going to be in that situation. But of course, that's always a risk that-- that's out--

JULIE HYMAN: Right.

BOB ELLIOT: --there for these.

JULIE HYMAN: And just quickly, before we move on to your goodbye, you hold Comerica?

BOB ELLIOT: I don't personally in my account, so.

JULIE HYMAN: OK.

BOB ELLIOT: For my business, but--

JULIE HYMAN: It's one that you like. OK. And then let's get to your goodbye, one that you would avoid. And this is a big bank. We're talking about Bank of America. So it's not as though automatically in your mind bigger is better in terms of what people should be buying. Here too, we start with valuation.

BOB ELLIOT: Well, I mean, you got to think about, you got two stocks that both were very exposed to the consequences of the SVB crisis. Bank of America, in particular, with a large securities portfolio that they've got to be booking in order to take the capital charges as a G-SIB. And so they're facing challenges as a function of that similar, challenges that happened in the regionals. It's just that they're priced about twice as high--

JULIE HYMAN: Yeah.

BOB ELLIOT: --as what you're seeing in some of the low-valuation regional banks that are out there like Comerica. And so when I look at this diff here, we've got essentially the best of the small and the worst of the big.

JULIE HYMAN: Got it, OK. And then also on that front, you're looking at net interest margin from Bank of America compared with that of a Comerica. And you say it does not favorably compare.

BOB ELLIOT: Yeah, I mean, Bank of America, given it's a G-SIB, should be killing it in terms of their overall deposit costs. But you're seeing that average deposit costs start to move up into the two range. That's a lot given there's so much incentive for big businesses to bank with Bank of America and their national footprint.

So that's causing them to see a NIM compression that is actually not that far off of what you're seeing from many of the regional banks. And I thought this was a nice interesting contrast that Bank of America, you know, is at 240. Comerica is at 260. You wouldn't necessarily have thought that right off the bat,

JULIE HYMAN: Right, and then finally, whereas Comerica is expanding, you're talking about the business here is not growing. And in particular, you wanted to highlight what we're seeing in loans and leases, which if you look at this over the past few quarters hasn't gone much of anywhere.

BOB ELLIOT: I mean, the whole advantage of being a G-SIB is that you can-- you should be able to outcompete all of the different regional competitors that are out there. There's a number of other big banks here in New York who have taken advantage of the weakness that has existed through organic growth as well as acquisitions.

Bank of America, it's been a flat business for several years. Now, we look here in terms of the loan book, the wealth management. Cards, they're lagging behind many of the other issuers. This is not a great franchise. It's a big franchise. But it's a lumbering, slow-moving one that looks expensive relative to some of the other options that are out there.

JULIE HYMAN: And effectively, the risk to your thesis is sort of the flip side of what we saw. If there is a crisis, money might flow into the banks. I want to get to our summary here of your buy and sell case. And by the way, any position in Bank of America--

BOB ELLIOT: No position, Bank of America.

JULIE HYMAN: --way or the other? OK, so to recap, you are saying to investors, you could buy Comerica based on its value against other regionals of a similar size and better balance sheet plus its potential for further growth as it expands operations, filling the gap that was left behind by the collapse of SVB and others. On the other side, you say maybe you want to avoid Bank of America-- high valuation, stagnating net interest margins despite being such a big player.