While catching up on what the billionaire hedge fund managers have been up to, I came across billionaire Louis Bacon’s $15 billion hedge fund, Moore Capital. What’s most interesting is that he appears to be very bullish on the banking industry.
“As a speculator you must embrace disorder and chaos” – Louis Bacon
Turnaround Banks
Citigroup Inc. (NYSE:C) is Bacon’s second largest holding. Although Citi’s 2012 revenue was down 10% year over year, its 4Q results showed positive signs. Loans were up 1.3% year over year for the quarter, and revenue up 3.3%. The bank also generated some $1.33 billion in income from continuing operations during 4Q 2012, which was up 34% year over year.
What’s more is that all its major geographical regions saw growth in operating income: North America up 121% year over year, Asia up 16%, Latin America up 16% and Europe, the Middle East and Asia up 6%.
The bank’s big “win” for the quarter (4Q), was net interest margin rose to 2.93%, compared to 2.86% during the third quarter. As well, the Federal Reserve “stress tests” put Citigroup Inc. (NYSE:C)’s Tier 1 common ratio as high as 8.3% by the end of 2014, well above requirements. I continue to believe that Citi is the best bank in the industry.
Bank of America Corp (NYSE:BAC) was one of Bacon’s biggest increases last quarter, upping his stake 100% and now is his third largest holding. Bank of America and Citi took some of the biggest hits during the financial crisis, with both still down 68% (Bank of America) and 80% (Citi) over the last five years, compared to Wells Fargo & Co (NYSE:WFC), up 14%, and JPMorgan Chase & Co. (NYSE:JPM) up 3%, over the same time period.
By price to book standards, Bank of America Corp (NYSE:BAC) trades at only 0.6 times, versus the industry average of 1.1 times. The bank also has a rapidly improving balance sheet. At the end of last quarter, the company’s Tier 1 common capital ratio (Basel 1) was 11.06%, compared to 9.86% for the same quarter last year.
The bank also continues to show resilience as investors stick with the company; its up nearly 5% year to date despite fourth quarter results that showed revenue falling 20% and net income down 60% year over year.
Top banks
JPMorgan is Bacon’s largest stock holding at the end of 2012, with over 5.7% of his portfolio invested in the bank. JPMorgan continues to show solid progress on all levels: loan growth grew 1.4% in 2012 and is expected to expand another 3.1% in 2013; non-interest expenses are expected to be down 1.3% and revenue growth of 0.5% in 2013.
The capital position also appears rather solid for JPMorgan Chase & Co. (NYSE:JPM). The recent Federal Reserve stress tests forecast that JPMorgan’s Tier 1 common ratio shows a solid 10.4% The bank estimates that its net exposure to the troubled Euro economies is only $13.9 billion. Big news of late includes the downsizing of the bank’s workforce to enhance profitability. This includes eliminating 19,000 jobs by the end of 2014. This should help the bank meet its $1 billion reduction target in overall expenses this year.
Wells Fargo is Bacon’s seventh largest holding. Initially, the bank appears expensive, trading at 2.7 times book value, whereas other major banks trade at an average of 1.1 times. However, the bank is one of the best positioned banks with vast cross-selling capabilities following its Wachovia acquisition. The bank continues to impress shareholders, last quarter recording its twelfth consecutive quarter of earnings growth.
The bank is also positioned well by capital and returns measures. Its Tier 1 common equity ratio was 8.18% under the latest Basel III capital proposals, well above 4% requirements. The bank’s trailing twelve month return on equity of 13.1%, is very robust compared to the industry average of 9.8%.
Insurance turnaround
American International Group Inc (NYSE:AIG) is Bacon’s fourth largest holding. The insurer came out of 2012 with long-term debt of $48.5 billion, down drastically from the $73.5 billion it ended 2011 with. Meanwhile, operating cash flow has also recovered, coming in at $3.68 billion for 2012, compared to a mere $81 million in 2011.
The good news doesn’t stop there, the stock managed to expand return on equity from 2.7% in 2011 to 7.2% in 2012; yet, the stock still trades at a mere 50% of book value, while industry comps are trading closer to 80%. Hedge funds also appear to be crazy about the insurance company.
Don’t be fooled
Billionaire Bacon loves banks, and it appears a couple of his top bets might be solid investments. Bank of America Corp (NYSE:BAC) and Citi are still being shunned, each trading at a discount to peers on a price to book basis, while JPMorgan and Wells Fargo & Co (NYSE:WFC) pay investors a dividend yielding more than 2.5%.
The article Billionaire Louis Bacon’s Bank Bets originally appeared on Fool.com and is written by Marshall Hargrave.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
