Longtime Fool contributor Matt Frankel, CFP, has covered the banking sector for about a decade, and owns a handful of bank and other financial stocks in his personal stock portfolio. However, two positions are by far the largest. In this Fool Live video clip, recorded on July 16, Frankel discusses his two largest bank stock investments with chief growth officer Anand Chokkavelu and why he owns each one.
Matt Frankel: Bank of America (NYSE:BAC) is by far the larger of the two in my portfolio. Why these banks? Bank of America, Brian Moynihan, I think is next to Jamie Dimon, he is a very close second in terms of the rockstar bank CEOs. He had a disadvantage that he started from a bank that was really struggling after the financial crisis. JP Morgan Chase (NYSE:JPM) was fine after the financial crisis, there was Bank of America and Citigroup (NYSE:C) that were doing terrible. JP Morgan and Wells Fargo (NYSE:WFC) were doing fine after the crisis. They have major cost advantages over the years, they have a higher percentage of non-interest bearing deposits. Meaning that as interest rates go up, the rates that Bank of America could charge on its loans will go higher, but it has a lot of deposits it doesn't have to pay for. That is a recipe for a really good profit margin. They're aggressively returning capital to shareholders, including buybacks and dividends, which recently went up.
Wells Fargo, I bought it earlier this year as more of a value play. I think we're just seeing the beginning of it getting back to where it was. The stench of all of its bad behavior is still following it. The federal reserve, this is the first time they ever did this to a bank, slapped the penalty on Wells Fargo where it can't grow past where it was at the end of 2018 as it was, which really limits how many loans they can make and things like that right now. I think that's going to change pretty soon. They got a new CEO, they're making all the right moves, things like that. Also aggressively buying back shares. I'd argue that they actually have the most to gain as rates rise of any of the big banks just because they are like 93% savings and loan. I think only 7% of their business is investment banking unlike all the other big banks. Do you guys own any banks in your portfolio? These were actually the ones I was surprised to see that Anand didn't own.
Anand Chokkavelu: I did at different times, I still own a lot of banks. Then I purged a lot of them. Some of it last year, I think I rotated out of a lot of things because things like Pinterest and things like that were so cheap.
Frankel: Yeah, that's fair.
Chokkavelu: I'm always thinking about Bank of America and Wells Fargo and things like that. But again, I tilt more toward 10X for the non-index part of my portfolio.