One of the few sectors that enjoy rising interest rates is the financial sector, and when the Federal Reserve started lowering interest rates this summer and followed up with more earlier this month, some of the top bank stocks were hit hard. While the KBW Bank Index (BKX) was knocked down to the tune of almost 8% in August but rallied back some, there remains a store of value in some of the top companies in the sector.
A new Baird research report makes the case that the top American banks should be able to avoid the problems that the Japanese and European banks have encountered. The report said this:
If and/or when the downturn inevitably comes, it is easy to see the bearish narrative shifting to the Japan/Europe examples to rationalize lower bank stock prices/multiples. With any help from the Fed, we think U.S. banks avoid this same fate. At this point in the cycle, investors should remain patient and use volatile shifts in sentiment to more aggressively buy banks on pullbacks.
We found four banks in the Baird coverage universe that are rated Outperform and make good sense for investors looking to add or increase positions.
Capital One Financial
This top bank has used relentless advertising to get the firm’s brand well known among consumers. Capital One Financial Corp. (NYSE: COF) is a diversified financial services company that offers a broad array of financial products and services to consumers, small businesses and commercial clients.
Capital One is one of the nation’s 10 largest banks based on deposits. It provides bank lending, treasury management and depository services, as well as credit and debit card products, auto loans and mortgage banking across the United States.
Shareholders receive a 1.75% dividend. The Baird price objective for the shares is $100, and the Wall Street consensus price target is $106.53. The shares closed Thursday trading at $91.13.
This top midcap bank makes good sense for the fourth quarter and into 2020. 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 offers investors a 4.13% dividend. Baird has a $19 price target, and the consensus target is $19.48. The shares closed at $17.78 on Thursday.
PNC Financial Services
This top regional bank is perhaps one of the best banking plays now. PNC Financial Services Group Inc. (NYSE: PNC) is one of the largest U.S. diversified financial services organizations and the sixth-largest U.S. bank by deposits, with $382 billion in assets.
PNC provides retail and business banking; residential mortgage banking; specialized services for corporations and government entities, including corporate banking, real estate finance and asset-based lending; and wealth management and asset management. With consistent earnings growth and a very positive and growing loan portfolio, the company is a premiere super-regional bank stock to own.
Shareholders receive a 3.28% dividend. The $141 Baird price target is lower than the $144.15 consensus figure. PNC closed on Thursday at $140.10.
This large cap bank is a solid value play for the rest of the year and 2020. Wells Fargo & Co. (NYSE: WFC) is a nationwide, diversified, community-based financial services company with $1.8 trillion in assets. The company provides banking, insurance, investments, mortgage and consumer and commercial finance through 8,700 locations, 12,800 ATMs, the Internet and mobile banking. It also has offices in 36 countries to support customers who conduct business in the global economy. Wells Fargo serves one in three households in the United States.
Wells Fargo has slowly, but surely, become one of the biggest mortgage lending companies in the United States, in addition to its normal banking and brokerage businesses. A continued increase in commercial real estate lending could really boost the bank’s bottom line and overall revenue.
Wells Fargo shareholders receive a big 4.14% dividend. Baird has set its price target at $52. The consensus target is at $48.48, and shares closed most recently at $48.87.
All four of these top banking stocks are trading well below their 52-week highs, and all boast extremely reasonable valuations. They make good sense for growth portfolios looking to add solid companies that have the potential for good moves higher over the fourth quarter and into 2020.