(MENAFN- Khaleej Times) In retrospect, my conviction that UAE investors should buy Citi shares in the 26-30 range in November 2012, when Vikram Pandit was replaced by Michael Corbat as CEO in a boardroom palace coup, was profitable.
Citigroup shares rose to a recent high of 55 until a mediocre fourth-qurter earnings miss slammed the shares. Citi's revenue miss was not offset by lower expenses and I no longer expect Citi Holdings reserve holdings to goose the shares, a key theme in 2012-13 which I highlighted in at least half a dozen columns. Securities and Banking (the old Salomon, Schroder, Citi Investment Bank franchise that gutted the shares in 2008 and led to a TARP bailout) revenues were hit by debacles in fixed income trading. Non performing loans in the Global Consumer Bank in Asia and Mexico crept higher. Expense costs/litigation reserves are a pain for Citi. The catalysts to propel the Citi shares higher in 2012-13 are no longer there. Why should I buy Citi at 11 times earnings when I can buy Jamie Dimon's House of Morgan at nine times earnings? JPM is the new Citi for me for now, unless Citi shares fall to 45
That being said, bank stock investing will remain core to my strategy calculus in 2014. An accelerating US economy with higher US Treasury yields with capex driven loan growth makes an irrefutable case for a valuation rerating in Fortress America regional bank shares, particularly if operating reserves and capital returns can well rise. I believe capex, commercial real estate, higher industrial production and strong job growth in Silicon Valley/Southwest states/East Coast all mean good things for corporate banking. I am waiting for JP Morgan to fall to 52 as I believe this is an ideal entry point to buy a money centre bank that could well earn $6 EPS in 2014, even more if the expense cost falls below $60 billion. Sure, Madoff liabilities/mortgage banking were a drag, J.P. Morgan is going to be the best performing money centre bank in the US in 2014
The impact of the bear market in fixed income/emerging markets, the Volcker Rule's restrictions on proprietary trading/market making, the Dodd Frank restriction on complex derivatives and the regulatory backlash after the Abuses/London Whale/LIBOR rigging scandals has been uniformly negative on Goldman Sachs. Goldman Sachs is arguably the world's preeminent trading firm, a classie Master of the Universe colossus once described as the world's biggest global hedge with a token advisory business that happens to be listed on the NYSE
Goldman's ROE was a mere 12.7, far below the 25-30 per cent peaks I remember in the Jurassic pre-Lehman era near peaks of past bull markets. The bank has been forced to scale down its vast FICC trading book due to regulatory/capital constraints. Sure, investment banking, equity underwriting and merchant banking revenues were stellar, the loss on momentum in trading means Goldman shares can no longer rerate on Wall Street. I expect a 160€180 trading rage for now. Rather than Goldman, I believe Blackstone could be the ideal vehicle to invest in the record global IPO pipeline (the hysteria over Alibaba and Twitter is proof of the pudding), a clear tailwind for private equity exit strategies Global equity capital markets fees were a record $16 billion in 2013. This is the reason Blackstone shares have risen from 17 to 33 in the past year. I had recommended Blackstone way back in 2012 in the 12-14 range when I saw Steve Schwartzman become America's largest residential landlord during the nadir of the property boost even as his AUM hit $250 billion. Blackstone is the world's preeminent private equity firm but real estate/credit lending are now 60 per cent of revenues. (PE a mere 20 per cent). Blackstone shares rose 100 per cent in 2013. This will not happen again in 2014. My buy-sell range on Blackstone is 28-36
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