Not many sectors are positive on rate hikes, but one that is has been on a solid run since the end of June, and it may be ready to really break out. Bank stocks are up a stunning 18% over the past two months, and with Fed Chair Janet Yellen’s comments last week leaving the door open for 2016 rate hikes, a strong jobs number this week could lead to a September increase.
A recent Merrill Lynch research report notes that the market implied probability has jumped from fears of a rate cut to a 42% and 63% chance of a rate hike for September and December, respectively. While, generally speaking, central bankers are loath to raise rates during an election cycle, the data may force their hand.
Merrill Lynch highlights two stocks in its report that could benefit, and we screened for two additional money center banks that make sense as well. All are rated Buy.
This top bank stock is still down over 15% from highs that were posted last summer, and the company also posted very solid second-quarter results. 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 very cheap 9.4 times estimated 2016 earnings, this stock looks very reasonable in what is becoming a pricey stock market. A continuing stock buyback program at the bank is a positive. The company’s institutional clients group appeared to be holding its ground last quarter. While investment banking revenue was down in an unsure macro environment, trading revenue remained strong, up 2% from last year.
Citigroup investors are paid a 1.35% dividend. The Merrill Lynch price target for the stock is $50, and the Wall Street consensus price objective is $54.19. Shares closed most recently at $47.26.
East West Bancorp
This smaller bank company is highlighted in the Merrill Lynch report, and it could benefit from a positive jobs number. East West Bancorp Inc. (NASDAQ: EWBC) offers various deposit products, comprising personal and business checking and savings accounts, time deposits and individual retirement accounts, travelers checks, safe deposit boxes, and MasterCard and Visa merchant deposit services.
Its lending portfolio consists of residential single-family and multifamily loans; commercial real estate loans and construction and land loans; trade finance loans; commercial business loans, including accounts receivable, small business administration, inventory and working capital loans; and consumer loans, such as home equity lines of credit, auto loans and insurance premium financing loans.
The bank is focused exclusively on the United States and Greater China markets and operates over 120 locations worldwide, including California, New York, Georgia, Massachusetts, Texas and Washington, as well as full-service branches in Hong Kong and Shanghai and representative offices in Beijing, Shenzhen and Taipei.
Investors receive a 2.21% dividend. Merrill Lynch has a $42 price objective, and the consensus target is lower at $40.75. The stock closed Monday at $36.20.