Despite a flood of money heading to Europe, and many analysts becoming more bullish on the emerging markets, the reality is, much of the big money in the eurozone may have been already made, especially when it come to the top banks. In a new research report, the UBS global banking team have clear favorites when looking around the globe for the top banks to buy, and the three that they favor the most all reside in the United States.
With overall sentiment appearing to be on the upswing, the UBS team has focused on data from the bank’s second-quarter survey that indicates loan growth expectations have improved, especially in the developed markets. While earnings risks are somewhat skewed to the upside, the survey respondents feel that overall valuations are reasonable.
The three banks that the UBS team recommends now are Citigroup Inc. (NYSE: C), Morgan Stanley (NYSE: MS) and Fifth Third Bancorp (NASDAQ: FITB).
Trading at just 9.7 times estimated 2015 earnings, Citigroup is very cheap. The stock got hit hard after missing first-quarter earnings estimates, and may be perfect large cap stock to buy for a rebound. Many on Wall Street were also thinking there was a reasonably good chance that the bank would not past the recent Federal Reserve stress tests, which it did in fine fashion.
While the stock has bounced sharply off the lows printed in early February, it still looks like a compelling buy here, especially with a dividend increase in the mix and a recent dip in the price.
Numerous Wall Street analysts cite the fact that Citigroup will be a leader in buyback payouts to shareholders. Combined with the bank’s strong domestic and international business, and a better overall economy, plus the headline stress test risk removed, share purchases look wise here.
Citigroup shareholders are currently paid a minuscule 0.1% dividend, which will increase. The UBS price target for the stock is $64, and the Thomson/First Call consensus price target is lower at $61.58. Shares ended last week at $51.86.
Morgan Stanley is one of the white glove Wall Street firms that continues to show tremendous growth, and it is running neck and neck with Goldman Sachs as the bank of choice for high-profile initial public offerings. Trading at a price-to-earnings (P/E) multiple of 12.72, that seems extremely reasonable, given the 2015 expectations for earnings per share growth of more than 20%. It also has 539 billion in cash equivalents on its balance sheet, versus $288 billion in total debt.
Morgan Stanley says it will raise its dividend to 15 cents and buy back up to $3.1 billion in stock after the Federal Reserve System signed off on the company’s plan in the first quarter. It plans to buy back the stock over five quarters, starting in the second quarter of 2015. The company had paid a quarterly dividend of 10 cents.
Morgan Stanley investors are paid a 1.1% dividend. The UBS price target is $39, and the consensus price objective is posted at $38.86. Shares closed Thursday’s trading at $36.06.
Fifth Third Bancorp
This top regional banking stock makes the grade at UBS. It operates four main businesses: Commercial Banking, Branch Banking, Consumer Lending and Investment Advisors. Fifth Third also has a 22.8% interest in Vantiv Holding.
Fifth Third is among the largest money managers in the Midwest and, as of December 31, 2014, had $308 billion in assets under care, of which it managed $27 billion for individuals, corporations and not-for-profit organizations. At that time, the bank itself also had $139 billion in assets and operated 15 affiliates with 1,302 full-service banking centers, including 101 Bank Mart locations, most open seven days a week, inside select grocery stores and 2,638 ATMs in Ohio, Kentucky, Indiana, Michigan, Illinois, Florida, Tennessee, West Virginia, Pennsylvania, Missouri, Georgia and North Carolina.
Fifth Third investors are paid a very solid 2.7% dividend. The UBS price target is $21, right in line with the consensus figure of $21.26. The stock closed most recently at $18.98 a share.
The UBS team gives three distinctive offerings for investors, ranging from a global giant to a super-regional bank. All these stocks would make good sense for growth-oriented portfolios.