GHARIB: Joining us now with more analysis on bank earnings, we have with us Fred Cannon. He`s co-director of research at KBW (NYSE:KBW). Fred, happy New Year. Nice to have you with us.
FRED CANNON, CO-DIRECTOR RESEARCH, KBW (NYSE:KBW): Thank you, Susie, great to be here. Happy New Year.
GHARIB: Same to you. So a lot of people have been predicting for this new year 2012, that this will be the turn around year for the bank. Others are saying it`s going to be a challenging year. How do you see it?
CANNON: We`re in the challenging year camp. Especially we saw coming into this new year it was a happy new year. We saw a pretty big stock rally in the banks about 10 percent with some of the big losers last year, Bank of America (NYSE:BAC) and Citi up almost 20 percent. The problem is now we face the music with the earnings reports and they`re coming in pretty tough.
GHARIB: What is your take so far on earnings? We had JPMorgan on Friday, Citi and Wells Fargo (NYSE:WFC) today. What`s your take away?
CANNON: As was just mentioned, the capital markets business and what that means is it means trading, foreign exchange, investment banking. That entire part of bank earning stream is under a lot of pressure. The volatility that we saw last year and the problems in Europe are just weighing on that part of the business and that`s what`s really keeping Citi and a lot of JPMorgan activity down. On the other hand, domestic basic banking is doing all right. It`s not a great environment, but it`s doing all right. We saw that at Wells Fargo (NYSE:WFC) where we see them continuing to make progress quarter in quarter out.
GHARIB: What are you expecting then from Goldman Sachs that reports tomorrow and Bank of America (NYSE:BAC) on Thursday and then in between that a lot of regionals?
CANNON: On Goldman Sachs they face a lot of the same pressures that we saw the problems with Citi. The only real question is did we get earnings estimates down low enough to hit, reduce expectations. That`s true in Morgan Stanley (NASDAQ:NBXH) (NYSE:MS) too. So I think those are going to be tough stocks as we go into the next couple days. Bank of America (NYSE:BAC) also continues to face issues. While Wells posted a great mortgage quarter, it`s hard to expect that out of Bank of America (NYSE:BAC).
GHARIB: And yet you are still recommending some banks. Let`s take a look at what your recommendations are for long-term shareholders. Among the big banks you like JPMorgan and Goldman Sachs. And looking at this next graphic coming up here among the regional banks you have a Sun Trust (NYSE:STI), U.S. Bancorp (NYSE:USB) and Capital One (NYSE:COF). Why these?
CANNON: That`s right. Primarily what we want to recommend to investors is the domestic banks that can make good profits in this environment. Particularly U.S. Bancorp (NYSE:USB) and Capital One(NYSE:COF) are top of the list on that score. We also think if you`re looking for a recovery story, Sun Trust (NYSE:STI) is one. It`s a solid southeast bank that we think can make good progress this year. We generally want to avoid those big global players. We think if investors want to play that and want to be invested there JPMorgan and Goldman Sachs is the place to be.
GHARIB: On the other end of spectrum, you like some of the small banks. These are banks that have assets under $50 million. Let`s look at the list. Not too many familiar names maybe for our viewers. CVB Financial (NASDAQ:CVBF), Columbia Banking System (NASDAQ:COLB), F.N.B. Corporation(NYSE:FNB), PacWest Bancorp (NASDAQ:PACW) . What`s the scene here and why do you like the small ones?
CANNON: The theme is the world has changed from the past relative to banking. It used to be the small banks were at a big disadvantage to those big players. They had to carry a lot more capital which reduced the ability to earn money on the investment. That`s all changed. Those big banks are now required to carry a lot more capital, a lot more regulated. Because these smaller banks are under the radar screen, they`re not too big to stay up. They`re able to gain market share. They`re able to take advantage of the situation and we think companies like those you just mentioned don`t hear those names, they`re not household names but PacWest (NASDAQ:PACW) is a good example in southern California, able to do a lot of things with their capital that the other big players can`t.
GHARIB: OK. We have to leave it there. Any disclosures, do you own any of these stocks or does your firm do business with them?
CANNON: I don`t. We do business with a number of financials and that`s in our disclosure. Thank you Susie.
GHARIB: Fred, thank you for coming to the program, appreciate it.
CANNON: Thank you.