When all of the tailwinds merge to bring about the perfect storm for any sector on Wall Street, you can expect most of the proverbial ships to benefit and get a lift from the rising water. The was surely the case in the first quarter as higher interest rates, improved credit profiles and most of all, perhaps, lower taxes helped to drive revenues for the top banks in the United States. The good thing for investors: those trends look to stay in place for some time.
In a new RBC research report, the firm’s financial equity team are very positive on all the positive metrics the top banks are benefiting from, and while not all banks are created equal, they are very positive on four of the major banks that serve business and consumers in the United States.
The report noted this:
The top 20 banks’ first quarter results reflected strong year-over-year earnings growth, robust capital positions, strong credit quality, the benefits of higher short term interest rates and lower tax rates and continued expense management.
The team also noted this when discussing expectations going forward for the banks in their coverage universe:
The expected upside in stock prices should be driven by growth in the industry’s core businesses, increased levels of capital returned to shareholders, and higher interest rates. We think potential appreciation ranges from 20% to 25% for some of the top 20 banks.
Four of the top banks are rated Outperform at RBC, and all make sense for investors looking to add or increase exposure to financials in their portfolios.
Bank of America
The company posted solid first-quarter results. 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.
Bank of America operates some 5,100 banking centers, 16,300 ATMs, call centers, online and a mobile banking platform, and the company said it plans to open 500 new branches as it issued upbeat financial results that topped Wall Street forecasts. Revenue for the January-to-March period was higher than in the same stretch last year, too.
Bank of America investors are paid a small 1.6% dividend. The RBC price target for the shares is $35, and the Wall Street consensus target was last seen at $34.91. The stock closed Wednesday’s trading at $30.14 a share.
This stock has broken out of a long trading range, and financials often do very well rates go higher. 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 11.2 times estimated 2018 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 as well.
On Friday, Citigroup reported quarterly earnings and revenue that beat analyst expectations, as the company’s results got a boost from lower corporate taxes and strong revenue from stock trading. While revenue from Citigroup’s fixed-income trading business fell 7% in the first quarter, that was offset by a 38% hike in equity trading sales. Overall trading revenue grew by 3% in the quarter.
Citigroup investors are paid a 1.85% dividend. RBC has an $85 price target for the stock, and the posted consensus price objective is $84.13. The shares closed most recently at $69.36.