While the market was beating up on Citigroup and Bank of America after quarterly results announcements Thursday morning, Sandler O'Neill principal Jeffrey Harte was saying there's much to like about the money center banks — particularly the advantages of scale.
"The key thing is what are the core or sustainable things going on versus one-time items — there were a lot of charges in the quarter," he said. "When you look at things like loan growth, credit quality and net interest margin relative to their banking peers, I think they have a more defendable (net interest margin.)"
Citigroup missed earnings and revenue estimates, while Bank of America beat earnings estimates but saw profit fall from last year due to mortgage-related charges. Both companies' shares traded down more than 3 percent after the announcements.
So it was a "tough day," Harte acknowledged. "But I didn't see much in the underlying trends that concerned me about earnings for the year."
He said the $1.3 billion in litigation charges that hit Citigroup were larger than expected, "but it's not unprecedented in recent times and hopefully this puts some of it behind us."
Harte said a key to his positive outlook on these banks was scale: "In banking right now scale matters more than it ever has, with the regulatory costs coming up."
"The pressures hitting banks right now are net interest margin. I think the money center banks have a unique advantage to not have as much pressure," he said. "And expenses — it's tough to be efficient with the rising compliance and regulatory costs. And money center banks have unique scale to perform."
Furthermore, the worst may be behind. "I don't have the feeling that regulatory pressures are building on money center banks," Harte said. "I feel the environment is still tough but getting friendlier."
—By CNBC's Matt Twomey
- Sandler O'Neill's Jeffrey Harte, his family and his firm have no stock ownership in Citigroup or Bank of America.
- Sandler O'Neill has received compensation from the listed companies for providing products or services other than investment banking services in 12-month period.
- Bank of America Corp. and Citigroup Inc. are clients of and receive non-investment banking securities-related services from Sandler O'Neill.
- Sandler O'Neill Partners served as a financial adviser to Bank of America in its sale of certain branches to Old National Bancorp.
@Matt_Twomey on Twitter.