One of the few sectors that enjoys rising interest rates is the financial sector. When the Federal Reserve said recently that there would be no additional interest rate hikes this year, the KBW Bank Index (BKX) was knocked down to the tune of almost 8%, which moved the overall sector into almost panic valuation territory.
While that is bad for current holders of the big money-center banks and investment banks shares, it may be just the move for those looking to enter the sector or add to holdings.
A new Oppenheimer report makes the case that no further rate hikes for the foreseeable future will have an impact to be sure, but the recent price decline somewhat takes that into consideration, and the banks are now in much better balance sheet shape. The report noted this:
The industry is not anywhere near distress. While it is a commonplace that it is “late in the cycle,” we believe the industry’s financial condition has never been better. Asset quality is structurally better than in past cycles as the Comprehensive Capital Analysis and Review (CCAR) and other changes have forced banks to systematically de-risk their balance sheets. Despite our modest earnings estimate reductions for 2020, our target prices actually go up from our last industry because the market multiple increased from 15.4x to 16.7x. Otherwise, we have kept our relative valuations unchanged.
The Oppenheimer team continues to recommend seven outstanding stocks, but here we focus on four with the biggest upside to the firm’s price targets, which were lifted recently.
Bank of America
The company posted solid fourth-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. It said its quarterly profit tripled to a record of $7.3 billion. The bank also says it bought back $26 billion in common stock. A strong performance from the company’s consumer banking business, as well as lower corporate taxes, helped drive Bank of America’s earnings.
Bank of America investors are paid a small 2.2% dividend. The Oppenheimer price target for the shares is $40, and the Wall Street consensus target was last seen at $33.33. The stock closed Tuesday at $27.21 per share.
This top bank stock has rallied back nicely from the December lows. 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 8.1 times estimated 2019 earnings, this company looks very reasonable in what remains a pricey stock market. A continuing stock buyback program at the bank also is a positive.
Citigroup investors are paid a 2.94% dividend. Oppenheimer has placed a huge $99 target on the shares. The posted consensus price objective is much lower at $77.15. The stock closed trading at $61.22 a share on Tuesday.