The 2014 All-America Research Team: Banks/Large-Cap, No. 1: John McDonald

< The 2014 All-America Research TeamJohn McDonaldSanford C.
Bernstein & Co.First-Place Appearances: 1

Total Appearances: 9

Analyst Debut: 2005

After four straight years at No. 2, Sanford C. Bernstein & Co.’s John McDonald rises to claim his first top finish on this roster, earning praise for his acuity and experience. “He asks the tough questions on earnings calls,” declares one appreciative fund manager, “going to the heart of investors’ key concerns.” More broadly, McDonald is “the go-to guy for understanding the industry’s regulatory issues,” another backer insists. Little wonder, given the analyst’s history. Before joining the sell side, McDonald worked as a regulatory attorney at the Federal Reserve Bank of New York, armed with a J.D. from Harvard Law School and a bachelor’s degree in labor relations from New York’s Cornell University. He next covered banking shares at UBS then Banc of America Securities and jumped to Bernstein in 2008. The 45-year-old researcher maintains that “balance sheets are in great shape, but earnings prospects are muted by low interest rates, sluggish loan growth and tepid trading volumes.” Consequently, he is monitoring the timing and pace of anticipated interest rate hikes and attendant pick-up in borrowing and trading, as well as an easing of litigation and regulatory costs. Regarding specific names, he believes that New York–based Citigroup offers the best risk-reward balance in the group, noting also that market expectations are very low. The stock has underperformed, notes McDonald, because market participants are disappointed about the firm’s stress test failure, lack of capital returns and slow trading volumes. In late March the U.S. Federal Reserve rejected Citi’s capital plan for the second time in three years, and investors punished the bank’s shares, selling off 8.9 percent over the following two weeks. As of mid-September, the nation’s third-largest bank holding company, by assets, was up 4.3 percent since March, at $52.31, but lagged the broad U.S. market by 2.8 percentage points. He deems its valuation attractive and forecasts that earnings per share and return on equity will improve in 2015 and beyond, as legal costs decline, management’s efficiency efforts take hold and global markets improve. “We also believe that Citi will pass the Fed’s 2015 stress test process and secure the Fed’s approval to begin distributing a meaningful amount of its excess capital in 2015, which should mean rising dividends and share buybacks for the next several years,” concludes McDonald.