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Citi's investor call didn't impress this analyst yet he maintains a ‘buy’ rating, here's why

Ken Leon, CFRA Research Director, joins Yahoo Finance’s The First Trade with Alexis Christoforous and Brian Sozzi to discuss the latest earnings reports from major banks including Bank of America, CitiGroup and Wells Fargo.

Video Transcript

BRIAN SOZZI: OK, switching gears here. Bank earnings are coming in hot and heavy, and overall, they paint a mixed picture on the state of the economy right now. Ken Leon, who covers the big banks at CFRA, is here break things down. Ken, good to see you, as always. Going through all these big banks, pretty much got all the results today, do the banks have a serious expense problem? You know, I was looking at the expense structures at all of these companies, and they really appear out of whack, in part because of COVID, which has me thinking, layoffs are looming.

KEN LEON: Yeah, so for the classic commercial banks, the big four, there is always an issue with costs, especially when you have pressure on net interest income with lower rates and an economy that's still on its back looking for recovery. The investment banks, it's a very different picture. There, it's a question of higher investment in technology and enabling them to take market share in areas of trading and investment banking, so it's really a tale of two stories.

ALEXIS CHRISTOFOROUS: Ken, we saw JPMorgan Chase, Citi, I believe Bank of America as well, setting aside less money than they were the prior quarter for possible loan falls. Is this the right time to do that? Did they just put so much aside the previous time that they can actually pull back a little bit now? Because you look at the economy and prospects for a recovery, and you look at job cuts piling up, and you think, aren't these loan defaults just going to rise?

KEN LEON: It's a great question, and through the, you know, dire period in March through June, the question was how bad can it be? So the banks were conservative, especially with consumer on credit card and distressed industries. We did see in the September quarter that the risk of further charge offs seems to be less, and there was actually some reserve release yesterday from JPMorgan and Citi but not today with Wells Fargo and Bank of America. But the confidence really is that that kind of risk is in the rear mirror for seeing sizable new provision of loan loss. And then you get into the quirky business of banks is that as we get into recovery, you want to see more loans, more volumes, and at the same time, now that they're in reserves, there will be charge offs, but it's not going to impact their earnings in 2021.

BRIAN SOZZI: Ken, that Citigroup call yesterday was almost as long as "War and Peace," about an hour and 42 minutes here, and they were really, analysts were really peppering outgoing CEO Michael Corbat, but why wasn't incoming CEO Jamie Frazier on that call? As you step away from that Citi call, is Citigroup the new Wells Fargo, one of the big bank stocks that really have to get their house in order, and it may not happen for the next couple of years?

KEN LEON: So I've been an analyst for a long time, haven't heard a call like that, and I don't think Citi managed to call well. Yeah, you want to give a new CEO three months to figure it out, but yesterday they just let it opened up, because they couldn't give answers in terms of cost cutting, selling businesses. So there is a dichotomy here in terms of the messaging from the bank was terrible, but investors see an upside. It's not Wells Fargo. I don't think the Fed's going to take them down a deep hole in terms of asset freeze, because they didn't take profits. They just didn't invest in their systems. What it does mean too is this stock is trading at less than half of book value. There's great businesses here that with a new CEO, as a McKinsey background, it's likely to streamline, and that's going to be a great return for investors. So we have a buy on Citi.

ALEXIS CHRISTOFOROUS: All right, when you look out though at the bank landscape, who is best positioned? Whose balance sheet do you like the best as we continue to struggle our way out of this pandemic?

KEN LEON: So I have the benefit that I don't cover 30 bank stocks fortunately, and the ones that we have strong buys are Morgan Stanley and Goldman Sachs, which don't have the risk in terms of steep loan loss or worries about net interest income. These are just really doing great in the capital markets. And the traditional commercial banks, we have a buy on JPMorgan. Year after year, really going back to 2008, they just hit the metrics much better than their direct peers. We did see that in the third quarter, and of course, JPMorgan, in my view, is somewhere in the middle, so we have a buy on it.

BRIAN SOZZI: Ken, no time like the present than to launch coverage on 30 more bank stocks.

KEN LEON: I prefer the real estate and housing ecosystem. We have another great analyst, Pauline Bell, who covers the regionals and Canadian banks. But looking at the big six that I cover, they are gaining global market share. Unfortunately, they're not firing on all cylinders, and most investors, whether on the institutional or individual side, they want to see a steepening yield curve before these stocks really take off, barring Goldman or Morgan Stanley, you know, with the haves being the Wall Street market, have not been Main Street.

BRIAN SOZZI: So true. All right, let's leave it there. Ken Leon, Analyst at CFRA that covers the bank. Always good to see you, Ken.