Bank of America (BAC) and Citigroup (C), two main US banks which have been on the retreat since 2008 as the most pressed lenders, are selling assets to deleverage and consolidate capital. Bank of America is the worst affected, though Citi comes close behind.
In recent days, BAC announced the sale of 10.4bn shares in China Construction Bank recording a USD 1.8bn after-tax gain. This confirms the strategy of Bank of America's CEO Brian T. Moynihan, to clean-up USA’s largest retail lender's balance sheet and focus on core US banking. It is the US bank under most pressure operationally with Wells Fargo pressing on taking some of its market share on lending and JP Morgan Chase threatening it too by picking up the pace in the US deposit market.
Citi on the other hand, although considered as a Bank of America peer, has a more global operational structure with large operations in Asia and EMEA. Citi has also off-loaded large amounts of assets, primarily in the Citi Holdings division.
The housing market could change everything – watch next data release 17 November
In a
previous theme we took a look at the supply and demand situation in the US housing market. The findings indicate that the current construction pace, New Housing Starts at approx. 600,000 (annual rate) lag the normalised depreciation of houses by approximately 1.2 mln houses annually meaning that foreclosed homes might at some point be sellable on the open market. Last month saw 655,000 new housing starts, the best reading since April 2010. On 17 November the figures for October will be released - expected at 606,000, -8 percent month on month. This data will be a very good indicator of the health of the potential recovery.
As New Housing Starts seem to be stabilising, although at low levels, we are now witnessing a pace where mortgage banks will be in a stronger bargaining position for every day that passes and we might just have passed the largest bump in the road (see chart 1). This is a rough estimate, since many houses in structurally distressed areas such as parts of Michigan and Nevada along with other prior expansionistic states will probably never regain any value.
Betting on US housing recovery – focusing on the lowest valuation
To leverage on a potential recovery in the US housing market, we need to identify the most exposed players with a core operational earnings momentum and valuation that will give us the most “bank for the buck” - a road we have been down before in
previous articles. The current valuation picture among the US banking titans is very diverse, reflecting the complexity of the respective bank’s risks (see chart 2). Citi does post a much more rigid capital position with a Tier Common Capital ratio at 11.7 percent in Q3 2011; the same number for Bank of America was 8.7 percent. This has increased concerns for the need for a capital increase, which means dilution for existing shareholders.
Regardless of this development Bank of America still presents the most clear-cut US exposure right now in terms of market focus and fundamentals. In 2010, 79 percent of total operating income (net revenues) comes from its US activities; the same figure for Citigroup is 40 percent. Non-US credit exposure is relatively low, with the main risks to be found in the mortgage market and commercial loans (see chart 3). Furthermore, the geographical weight is towards California, Florida, New York and Texas (see chart 4). Interest income from loans and leases contributed to 40 percent of Bank of America's total operating income. So if you believe that US housing will prevail, Bank of America could be your chance to become exposed.
