Banking & Finance

Wall Street Needs to Get Real About Banking and Finance Expectations for 2019

Other Financial Stocks

The other financial stocks took it on the chin as well in 2018. Their expected “total return” upside also seems ridiculous when you look at the table below.

Bank of America Corp. (NYSE: BAC) lost about 16% in 2018 but was down about 25% from its 52-week high. Even with a better 2.5% dividend yield, how likely does it seem at the start of 2019 that investors should expect close to a 40% gain to new decade highs? It does at least have Merrill Lynch that can keep growing assets, but any further market losses will only erode away at their money management fees and asset base.

Capital One Financial Corp. (NYSE: COF) may be a leader in independent credit card issuers, but it lost 24% in 2018 and was estimated to have an implied total return of 50% to new highs in 2019. How realistic does that sound at a time when credit standards should face some tightening and when consumers may start to slow their spending?

Citigroup Inc. (NYSE: C) has often been touted the bank with the most upside, as it traded below book value when all other money-center banks traded above book value. But things don’t seem to be the same in 2019. After losing 30% in 2018, does a return to a decade high and a 60% total return upside seem likely at this stage of the game?

Wells Fargo & Co. (NYSE: WFC) went from the king of banks to the “poster child of naughty” after its account-opening and customer handling scandals. Wells Fargo has even seen Warren Buffett and Berkshire Hathaway trim their massive stake in recent quarters. After the stock lost 24% in 2018, Wall Street’s implied upside would be over 36% in 2019, if you include its dividend yield. The one thing that makes this look less ridiculous at the current time is that Wells Fargo’s 52-week high would still be about 10% above the year-end consensus price target.

Morgan Stanley (NYSE: MS) often trades more or less in-line with Goldman Sachs. That said, its loss in 2018 was “only 24%,” versus a 34% loss for Goldman. With a year-end price of $39.65, at least the consensus target price of $56.22 was still under its 52-week high of $59.38. Still, it is hard to think a 44% implied total return seems realistic in this current climate.

BAC COF C WFC MS
2018 Close $24.64 $75.59 $52.06 $46.08 $39.65
2018 Gain/Loss -16.50% -24.10% -30.00% -24.00% -24.40%
52-Week Range $22.66 – $33.05 $69.90 – $106.50 $48.42 – $80.70 $43.02 – $66.31 $36.74 – $59.38
2019 Target $33.87 $112.19 $81.88 $61.26 $56.22
Est. Upside 37.46% 48.42% 57.28% 32.94% 41.79%
Yield 2.50% 2.10% 3.50% 3.80% 3.00%
Tot. Return Est. 39.96% 50.52% 60.78% 36.74% 44.79%

 

As we noted in our 2019 Bull/Bear Outlook, it seems very likely that analysts will be lowering their price targets in January and early in 2019. This needs to happen in many sectors, and the financial sector needs price targets cuts just as much as other leading sectors. This does not mean at all that bank and finance stocks cannot rise in 2019. They very well could rise, particularly if Jerome Powell and the Federal Reserve finally realize that they can stop raising interest rates. It’s not normal to see consensus upside projections of over 20% for the market as a whole this late in the business cycle, but looking for routine upside of 30% to 50% in the major banks and financial stocks seems even more unreasonable.