One of the good things that often come out of desperate times, like the mortgage meltdown crisis of 2008 and 2009, is regulation that is put in place to make sure that kind of blowup doesn’t happen again. Each year now, financial institutions are subjected to the Dodd-Frank Act Stress Test (DFAST), which is a set of forward-looking exercises to ensure participating institutions have sufficient capital to absorb losses and support operations during adverse economic scenarios.
The DFAST is viewed in conjunction with the more comprehensive Comprehensive Capital Analysis and Review (CCAR) exercises, which offer details into each company’s capital plans. This year, all 34 participating companies passed the test, which is not only good news for investors, but good news for the country as a whole.
The RBC financials equity analysts did a thorough review of tests, and they make the case the industry is much stronger than before, and said this in the report:
With the DFAST results and expected capital plans that will be released this week, we believe the Fed has shown that the U.S. banking industry is very well capitalized and positioned to handle adverse economic scenarios. We continue to recommend that investors should be overweight the bank stocks.
We picked five of the firm’s favorite stocks to buy now, all are rated Outperform
Bank of America
The company posted solid first-quarter results, and it expects a significant increase in net interest income for the current quarter. Bank of America Corp. (NYSE: BAC) is a ubiquitous presence in the United States, providing various banking and financial products and services for individual consumers, small and middle market businesses, institutional investors, corporations and governments in the United States and internationally. It operates some 5,100 banking centers, 16,300 ATMs, call centers, online and a mobile banking platform.
The company reported quarterly revenue that handily beat consensus estimates and was up 7% from a year ago. And earnings blew out expectations. This is very good news, as Bank of America’s business continues to improve at a faster-than-expected pace.
Bank of America investors receive a 1.3% dividend. The RBC price target for the stock is $26, and the Wall Street consensus target is $26.07. The shares closed Friday at $22.82.
This top bank is trading at just above the level it was in the summer of 2015. Citigroup Inc. (NYSE: C) has approximately 200 million customer accounts and does business in more than 160 countries and jurisdictions. It provides consumers, corporations, governments and institutions with a broad range of financial products and services, including consumer banking and credit, corporate and investment banking, securities brokerage, transaction services and wealth management.
Trading at a still very cheap 10 times estimated 2018 earnings, the bank looks very reasonable in what is becoming a pricey stock market. A continuing stock buyback program is a big positive. The company’s institutional clients group appeared to be holding its ground last quarter, and while guidance released in January was conservative and somewhat disappointing, it is cheap at this level.
Citigroup investors receive a 1.06% dividend. RBC has a $65 price target. The consensus price objective is $64.85, and shares closed Friday at $63.41.