Banking, finance, and taxes

Jefferies Very Bullish on Banks: 4 to Buy for the Rest of 2018

Lee Jackson

Published: April 30, 2018 8:50 am

Last Updated: January 12, 2020 12:18 am

When all of the tailwinds merge to bring about the perfect storm for any Wall Street sector, you can expect all the proverbial ships to benefit and get a lift from the rising water. That 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 U.S. banks.

The good thing for investors is that those trends look to stay in place for some time.

In a new Jefferies research report, the financial equity strategy team is very positive on all the strong tailwinds the top banks are benefiting from, and while not all banks are created equal, the team is very positive on four of the major banks that serve business and consumers in the United States.

The report noted this:

Equity strategist Sean Darby remains bullish on US financials despite concerns around a flattening of the yield curve. Credit spreads have tightened, financial conditions remain relaxed and both the FDIC and Senior Loan Officer surveys are upbeat for the banks. He believes that equity markets can live with higher yields and a shift of the yield curve upwards. He expects loan growth to have bottomed and thinks it will provide a tailwind for the banks.

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. It operates 5,100 banking centers, 16,300 ATMs, call centers, online and mobile banking platforms.

Bank of America’s earnings rose in the first-quarter, and the company said it plans to open 500 new branches as it issued upbeat financial results that topped Wall Street forecasts. The reported net income of $6.9 billion, or $0.62 per share, exceeded the predictions of financial analysts surveyed by S&P Capital IQ. Revenue for the January-to-March period totaled $23.1 billion, up from $22.2 billion for the same stretch last year, and higher than the analysts’ forecast.

Bank of America investors are paid a 1.6% dividend. The Jefferies price target for the shares is $35, and the Wall Street consensus target was last seen at $34.91. The stock closed Friday’s trading at $30.15 per share.

Comerica

This is a smaller large cap bank that is often off the Wall Street radar, but it may provide a very compelling investment idea. Comerica Inc. (NYSE: CMA) is a financial services company headquartered in Dallas, Texas, and strategically aligned by three business segments: business bank, retail bank and wealth management. It operates branches in Arizona, California, Florida, Michigan and Texas, as well as in Canada and Mexico.

Top analysts are confident the company can deliver on its efficiency initiatives and is trying hard to maximize shareholder return. While some have lowered the firm’s net interest income estimates, that should be offset by lower provisions for loss. A rise in interest rates would certainly be a tailwind.

Comerica’s first-quarter earnings per share jumped 51% to $1.54, beating Wall Street expectations. However revenue rose 7% to $793 million but missed consensus estimates. Comerica’s average total business loans for the quarter crept up to $48.4 billion from a year ago but slipped from the fourth quarter.

Comerica shareholders are paid a 1.59% dividend. Jefferies has a price objective of $105, and the posted consensus target price is $104.29 a share. The stock closed most recently at $96.29.

KeyCorp

This is one midcap bank pick that makes good sense for 2018. KeyCorp (NYSE: KEY) operates as the bank holding company for KeyBank National Association, which provides deposit, lending, cash management and investment services to individuals, small and medium-sized businesses.

The company also provides a broad range of sophisticated corporate and investment banking products, such as merger and acquisition advice, public and private debt and equity, syndications and derivatives to middle market companies in selected industries throughout the United States under the KeyBanc Capital Markets banner.

The top managers are attracted to the larger regional banks, as valuations look very reasonable and cost-saving plans are helping to make forward estimates look very achievable. With overall credit remaining solid, earnings and loan deposit and fee growth all are positive metrics for the bank.

KeyCorp earnings for the first quarter came to $0.38 per share, more than in the same period of the year prior. While it didn’t beat Wall Street’s earnings estimates for the quarter, it did match it. Reported revenue for the quarter totaled $1.55 billion. While it was better than the revenue for the same period last year, it just missed the analysts’ forecast for the period.

Investors in KeyCorp are paid a 2.07% dividend. The $25 price target at Jefferies compares to a consensus target of $23.29. The shares were last seen trading at $20.41 apiece.

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Signature Bank

This regional bank has a leading presence in New York City and is a Wall Street favorite. 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.

Net income for the 2018 first quarter rose year over year to $34.5 million, or $0.63 diluted earnings per share. Excluding write-downs and fair value adjustments for the taxi medallion portfolio, net income would have been a record $146.8 million, or $2.69 per share.

Jefferies has a whopping $178 price target. The consensus price objective is $163.20, and the shares closed trading at $130.22 on Friday.

Shares of these four top banks have dropped significantly in price from levels posted earlier this year, and all are offering solid entry points for investors looking to add shares. With first-quarter earnings out of the way, and some smooth sailing ahead for the sector, they all make good sense for long-term growth accounts now.