Tuesday, March 13, 2012

Bank shares rally on JPM

This week, we find out about how banks have fared on the stress tests to which they are being subjected by the US treasury.  In an interview a few days ago, Brian Moynihan, CEO of Bank of America indicated that the banks would be shown to be fine, even under extreme conditions (including unemployment of 20% with the related cases of default).

Today JP Morgan demonstrated that they are in the strongest position of all of the US banks by announcing a dividend hike and a massive buyback, equivalent to almost 10% of their market capitalization.  With a payout ratio of 25%, JPM appears to have lots of room to increase the amount of its dividends go forward.

I believe that BAC is in a similar position, even though operational changes have allowed Chase to take over leadership in branches, I firmly believe that BAC is a stronger franchise.  (I cannot believe that I am saying this given that J. Pierpont Morgan is a personal hero).

By 2013 BAC will also be paying a dividend and buying back some of the nearly 11bn shares outstanding.  The stock, which had a nice rally today, will trade at $16-20.  Even with the rally since December, the stock is well positioned to post nice gains over the next 12-24 months.  This is why I am very long the stock, it is by far my largest position.

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