The banking industry is a rather boring one, but it is the industry upon which our modern economies are built. Although there is lots of value out there in the markets, it is important to recognize that there is also lots of risk, and so I wanted to provide options to take advantage of the down market, while also maintaining a secure portfolio with some tailwinds. Now, as a prelude, it is important to note that the banking industry would be similarly susceptible to the potential collapse of real estate and credit as it was before in ‘08. Although they have tightened the balance sheet, a full economic collapse would bring them down, but in that case you should only be buying Treasuries…
The two banks are both incredibly influential in their own rights, but what draws me to them is a combination of value and dividend. Both of them have had their equities suppressed by their participation in lower value international markets, as opposed to the obviously much higher return on equity US and Canadian markets. However, this has led to substantial opportunity.
My play for Citigroup is incredibly simple. I think the concerns on its foreign operations are incredibly overblown, especially with the recent success they’ve had in winding that down to only the most profitable operations - the discount you get in exchange is frankly ridiculous. Citigroup trades for about 0.5 book value. That means if the bank were to liquidate all of its assets you would double your money… That is way too cheap, and is like half of what its peers trade for. Meanwhile, with a 4.5% yield, it almost doubles its peers like BAC, and provides substantial opportunities for retired dividend investors. Finally, although much worry has been made over the risk in exposure to developing nations, it must be said they also offer incredible opportunities for those willing to take the additional risk, as their GDP is inherently growing faster, while their banking penetration is also lower. From a macro perspective, Citigroup, like all banks, is likely to benefit from rising rates although their investment banking sector is getting killed. Given how much of a discount they trade in relation to their portfolio the increased yield should be even more impactful.
My thesis for BNS is also very simple. They have a ton of exposure to the international sector, but in contrast to Citigroup have a much more stable version of it. Their Latin American operations are some of their most profitable, and carry with them the same diversification and growth opportunities. Meanwhile, BNS offers a mouth-watering 6.3% yield - enough to convince any dividend investor to participate. The company does trade for around 1 times book value, but given its safety, and expected growth above peer group, it is an excellent place to park your money.
Overall, although it is easy to just say buy the dip, many don’t feel comfortable with the gamble, and these are good places to park your money while you wait.
By: Mateo Gjinali
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