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With Banks, More Good News Than Bad, Finally

Wed, 17 May 2017

Wells Fargo and Citigroup are recovering from their struggles, but we think there's room for caution.

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Video Transcript

Jim Sinegal: For the first time in a long time, good news is starting to outweigh bad news for banks. However, the good news is more than reflected in the stock price, and there's a little bit of room for caution. 

We've started to see the first hints that credit quality is starting to worsen. Loan losses in auto loans and credit cards started to tick up in the first quarter. We also seem to have taken a breather on the interest-rate front. We've been saying for a long time that interest rates will be slow to rise due to a combination of demographics, changes in the leverage cycle, and advances in technology.

That said, we favor the stocks that are less sensitive to interest rates--Wells Fargo and Citigroup. Both of those stocks have had some problems in years past. Wells Fargo had a sales scandal in the fall of 2016; Citigroup has obviously been struggling for a long time. But both of those stocks are starting to recover. Well Fargo's customers have stopped leaving, accounts are stable at Wells at the moment, and the dividend yield is approaching 3%. Similarly, Citigroup had a great first quarter. Expenses are under control and revenues are starting to rise again.

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