Mike Mayo

Morgan Stanley and Citigroup are among the strongest picks right now in the financial sector, CLSA bank analyst Mike Mayo says.

Transcript:

what is your top pick right now in the space? for some reason, it seems — not seems to, but it has underperformed lately. my three top picks, as you’ve heard before on this show, aremorgan stanley, morgan stanley, morgan stanley. it hasn’t labored at all? it’s done great. it’s done a double since july oflast year and we think it’s on the way to doubling over the next three years. why have the banks underperformed? well, joey, i think you’re negative, you mentioned earnings concerns. i cut my numbers on the big banks. so have others. consensus has come down. earnings in three weeks. we’re in this period buy the extended dip, for your point, steve, earlier, buy the extendeddip for morgan stanley and citigroup, revisions go lower if if they underperforming. what about trading revenues being lower at city group? and obviously the run-on of concern if you’re worried about trading at citi, then you should worry perhaps morgan, goldman, some of the others? it’s not new news in the past two weeks now. i mean, we have fixed-income trading data at morgan stanley, citi, down one-fifth, one-fourth. next two year, down 10% each year. it’s down over the last three years. fixed-income trading this year revisions noise, you look back, six, 12, 18 months from now it will be a blip on the screen. guys? but in terms of then we saw cities, most recent to come out with going cut mortgage, the mortgage department, thousand works or wells do it, now you’ve got that, plus what the street is saying, not just trading but acceleration in decline, what would you say is the vulnerability to the stocks at this level or has it fullyabsorbed it at this point? revenues stink in the bankingindustry. we still think that this decade will be the worst decade for bank revenue growth since the decade of the great depression. loans have hardly grown this year in aggregate.mortgage rev fews are going down and trading are taking a hitthis quarter. that’s why i like a stock such as morgan stanley or citigroup, both multiyear turning points and where the restructuring story can cut through the revenue weakness. if you look at a one-year chart say on a morgan stanley ver ses a bank of america or citi, they’re almost identical. just about an identical chart to the t. when do one of these banks differentiate themselves? what happens where, you know, right now, you want to talk banks, they’ve pretty much been trading in tandem. i assume you are going to say it’s going to be morgan stanley but how does that happen? year to date morgan stanley has quote performed bank of america. if you continue with the revenuepressure, morgan stanley has more levers. half of morgan stanley is the wealth management business. we think those earnings will triple over three years. last time steve, rightfullyskeptical, as many investors are, but tripling of wealthmanagement revenues at morgan stanley in the next three years because they close their joint venture, just a couple months ago. the other half of the company is traditional investment banking where they’re taking out expenses and improving the profit market and fixed income trading which is why some of the financial have underperformed. morgan stanley that’s 15% of revenues at morgan stanley. you’re telling me you’re not owning morgan stanley because of 15% of the company and they’ve taken risk down by one fourth in that part of the company and assets are down by one third. it’s much more contained than the past. the concern, scott, with the financial is, you’re going to blow a big hole in the balance sheet of a morgan stanley or citigroup that’s not happening and not a tough call.