Financial Sector

The median North American financial stock trades at a 21% discount to its fair value estimate compared with a 1% discount at the end of the first quarter of 2022 and a 2% premium at the end of the fourth quarter of 2021.

Over 70% of the North American financial stocks we cover are undervalued, trading in 5- or 4-star territory, with only a single-digit percentage with overvalued 2- and 1-star ratings.…

BlackRock is one of their picks, with a FV of $880, currently trading around $620. It is one of my favorites too, as it is the largest asset manager with a dominant position in passive investments as well as providing tools and services to institutions, central banks and finance ministers etc. While earning may be lower because of AUM decline, they should quickly recover with the markets. No chance of them collapsing and needing a rescue from the government. So such a large decline is quite irrational.

Other picks are Citi and GS.


GS can make money irrespective of economic cycles and trading closer to book; Citi deep discount to TBV, the market is saying Citi cannot get its act together and there is no future. If you think they will make the investments necessary to pivot the business and there 190+ country presence is incredibly difficult to build and an asset, it is a great price to buy and wait for a double in 3 to 5 years, all the while collecting healthy dividend.

I agree that Citi is the cheapest big bank on many metrics and has the highest potential reward. But with Citi, it is an act of faith that the new CEO will finally deliver on what they have claimed they will do since the GFC, and repeatedly failed to do. Plus it has no moat at all.

BLK on the other hand has a wide and deep moat, and inflation, recession etc should not seriously affect its long run earnings growth. AUMs will rebound when market recovers and equity markets go up 7-8 of 10 years. And AUMs are not being lost to competitors, in fact flows to passive assets are growing. For such a high quality company to trade at such a steep discount to IV is a rare opportunity.

GS seems to have lost its way since the GFC, no longer viewed as the vampire squid. It has been significantly outperformed since the GFC by MS. It is spending lots of money to move to consumer online banking, where margins will remain low. I for one don’t trust GS management to reward shareholders. It is still run like a partnership and should to revert to being one, but then it won’t have access to all the cheap capital.


But with Citi, it is an act of faith that the new CEO will finally deliver on what they have claimed they will do since the GFC, and repeatedly failed to do. Plus it has no moat at all.

Citi was run with an aim not to fail on another crisis since GFC. That resulted in some of the mess, but on the positive side, they bought back over 1 billion shares, paying steady dividends. Now they started repositioning. I think their strength in TTS segment is under appreciated. I believe they will turn around and get to trade at least 1x of TBV. Let us see what happens.

BLK on the other hand has a wide and deep moat, and inflation, recession etc should not seriously affect its long run earnings growth.

Yes, I think their passive funds business is strong and even in recession will hold up very well. I think they have an ability to earn $4B even during cyclical trough. I am just not happy with the multiples, I will be happy to buy around $400, not sure it will get there. I am patient. Also financial stocks don’t trade 20x in general. I am starting nibbling around $500 and establish full position if it gets to $400.

I am still bearish overall. Another .75%, even 1% hike imminent and another one in September for .75%. Then there is QT. I am afraid that Fed may end up breaking the economy and we may get a washout. So I am prepared to wait.


BLK reported earnings today which are fairly impressive given the fall in markets this year. Here is Morningstar analyst’s take on it.

Although average AUM was down 7.2% year over year during the second quarter, BlackRock recorded only a 1.8% decline in base fee revenue growth when compared with the prior year’s period due to shifting product mix and a 1.4% increase in its realization rate. Total revenue was down 6.1% year over year, though, dragged down by lower levels of performance fee income. Even so, year-to-date top-line growth of 0.1%…

We are leaving our $850 per share fair value estimate in place and consider the shares to be undervalued. BlackRock continues to be our top pick among the more traditional U.S.-based asset managers we cover. The company’s shares are currently trading at a 30% discount to our fair value estimate.…

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I think their strength in TTS segment is under appreciated

Bang! This quarter Citi outperforms so strongly on the back of TTS. Here is an interesting exchange between Mike Mayo and Jane. At the end of it Mark, CFO explains the TTS business. Worth the read.

Mike Mayo – Wells Fargo Securities – Analyst

Hi. I’m trying to figure out if you’re lucky or smart, and the reason I say that is at your investor day, I mean, right up front, you said you have five core interconnected businesses led by services, led by TTS. And then a few months later, you have your best quarter in a decade. And it just seems so coincidental that you highlight that as a growth area and then just a couple of quarters later, boom, here we are.

So how much of that TTS growth is simply because of one-off factors? How much of it is due to a higher baseline because of, say, interest rates? And how much of that is due to market share gains? And just remind us what TTS and securities services is again because I think you got everyone’s attention with this quarter.

Jane Fraser – Chief Executive Officer

So why don’t I kick off, and then I’ll pass it to Mark? And it’s a danger here of how long you have, Mike, because there’s a lot to talk about. So I would encourage you to sit at the beach this weekend and have an excellent read of the supplement because we’ve provided you with a lot of good facts and proof points and information both around the services businesses and the others about the early progress on the strategy. TTS was able to fire, as I said, on all cylinders this quarter. About two-thirds of the performance was driven by business actions, and one-third was by rates.

And as Mark said, very active management of the deposit base, beta discipline across all the regions. And the NIR growth that you saw was driven by cards, by payments, by receivables, and by trade. When you look in the strategic drivers we laid out at investor day this quarter, cross-border transaction value, up 17% year over year; clearing volume, up 2% in U.S. dollar; commercial comp spend, up 62% as that business recovered; average trade loan balances, up 14%; average deposit balances, up 2%.

So that two-thirds that was not rates-related has a very broad and substantive set of drivers behind it that, as Mark said, puts us into a very strong position for continued momentum here. This level of year-over-year growth is very pleasing, but we would expect to see it revert to the medium-term guidance we gave you at investor day over time. But this was across the board, all elements firing. And I will give a shout-out to Shahmir, the Head of TTS, as well as to our securities services team.

But he has really instituted a culture of intensity, of tremendous focus, of discipline in how he is running the business as well. And I think that is also a contributing factor to the confidence that you’re hearing from us about this. Mark, do you want to explain what TTS and securities services is?

Mark Mason – Chief Financial Officer

Again, as you’ve heard us describe, the TTS franchise is core to our business. It provides obviously a network to the large multinational clients in over 90 countries. We manage the full swath of their working capital and cash management needs. We also provide trade financing for them and the vendors and partners.

And this is essentially, in many ways, what differentiates our franchise from others. And not only is it in and of itself a core growing, high-returning business but is one of the businesses that is well connected to the rest of the franchise when you think about the markets business that we have and the FX that we manage on behalf of clients. And so – and this is a particularly relevant time for us to be engaged with those partners as they manage through supply chain issues. And we’re there to again help them work through those things and provide them alternatives to their production and operations and similar-type services we provide to our investor client base from a securities services point of view.

Look, the strategy here did not start with investor day. That is – we obviously spent time with you talking about that. But this has been a part of the franchise that we’ve been investing in on an ongoing basis. And it’s important that we continue to do that, investments in technology, investments in onboarding of new clients and the services we provide, and enhanced digital capabilities and the operations.

So all of those things and some of that, what you see here is those investments starting to pay off.…

TTS y-o-y growth is 36% and q-o-q is 3%. If we end up having mild recession by 3rd quarter, Citi will be able to start the buyback and the stock has all the catalyst of increasing NII, declining reserve requirement, have capital ratio’s over and above required level with 1% management buffer and ability to do at least $15 to $25 B buyback over next 3 years or they can retire 25% of outstanding shares, while maintaining dividends and capital ratios.