Despite the fact that health care reform so far has failed miserably, the chances for at least some sort of tax reform look decidedly better. With the president trying to simplify the current system, lower corporate tax rates and come up with a repatriation deal for corporations to bring their huge pile of overseas cash back to the United States, most on Wall Street feel comfortable that something can get done. While the overall impact should be felt broadly, the banking sector may benefit in a big way.
In a new report, Erika Najarian, the outstanding bank analyst at Merrill Lynch, makes the case that historically the passage of a tax reform bill has been very positive for banks’ loan growth. Combine that with the potential for rising rates, and some of the top companies could get a serious tailwind the rest of 2017 and into next year.
The report focused on banks that should be meaningful beneficiaries of tax reform but that have lagged their peers year to date. These three are rated Buy at Merrill Lynch.
This stock trades at a very reasonable 12.55 times estimated 2018 earnings and could respond well in a rising rate scenario. JPMorgan Chase & Co. (NYSE: JPM) is one of the leading global financial services firms, and one of the largest banking institutions in the United States, with about $2.6 trillion in assets. The company as it is today formed through the merger of retail bank Chase Manhattan and investment bank JPMorgan.
The firm has many operating divisions, including investment and corporate banking, asset management, retail financial services, commercial banking, credit cards and financial transaction services.
The bank recently raised the dividend to $0.56 from $0.50, which was ahead of the of many Wall Street estimates. Top analysts also see share buybacks of $19.4 billion of stock through 2018, a huge positive for shareholders.
JPMorgan investors receive a 2.35% dividend. The Merrill Lynch price target for the shares is $99, and the Wall Street consensus target is $95.12. Shares closed Friday at $95.51.
This regional bank has a leading presence in New York City and is a member of the Merrill Lynch US 1 list. Signature Bank (NASDAQ: SBNY) is a full-service commercial bank with 29 private client offices throughout the New York metropolitan area. The bank’s growing network of private client banking teams serves the needs of privately owned businesses, their owners and senior managers.
Signature Bank also offers a wide variety of business and personal banking products and services. Its specialty finance subsidiary, Signature Financial, provides equipment finance and leasing as well as transportation and taxi medallion financing. Signature Securities Group, a wholly owned subsidiary, is a licensed broker-dealer, investment adviser and member FINRA/SIPC, offering investment, brokerage, asset management and insurance products and services.
The stock was hit hard recently, and the research report noted this:
Based on our discussions with investors, SBNY continues to garner significant interest given the recent sell-off in the stock. While several investors see the stock as washed out, the lack of near-term, stock-specific catalysts remains a hurdle. Investors are hoping that management has re-set the bar low enough that it can begin to meet or beat expectations.
The $165 Merrill Lynch price target is well above the consensus price objective of $153.62. Shares closed most recently at $128.04.
This is another stock for investors to look at now for safety, dividends and solid upside potential, and it was among the biggest winners in the analyst’s view. Wells Fargo & Co. (NYSE: WFC) is a nationwide, diversified, community-based financial services company with $1.8 trillion in assets. The company provides banking, insurance, investments, mortgage and consumer and commercial finance through 8,700 locations, 12,800 ATMs, the Internet and mobile banking. It also has offices in 36 countries to support customers who conduct business in the global economy. Wells Fargo serves one in three households in the United States.
Wells Fargo has slowly, but surely, become one of the biggest mortgage lending companies in the United States, in addition to its normal banking and brokerage businesses. A continued increase in commercial real estate lending could really boost the bank’s bottom line and overall revenue. The stock also remains a top Warren Buffett holding.
After some huge public relations stumbles, Wells Fargo’s sales issue should be largely behind it. The stock has lagged since the sales issue surfaced (underperforming the banking index by 20%). Most on Wall Street feel its successful Comprehensive Capital Analysis and Review, improvement in the efficiency ratio in the second quarter (with further improvement to come) and an attractive valuation make the company compelling going forward.
Wells Fargo shareholders receive a 2.83% dividend. Merrill Lynch has a $62 price target, while the consensus target is $57.83. Shares closed Friday at $55.15.
Needless to say, getting any help from the Democrats will be tough, but the president’s plan helps small business and the middle class, and those are demographics the Democrats have stumbled badly with in recent elections. With that in mind, compromise may come easier.