One metric that Wall Street analysts often count on when doing their work on various sectors is comparable periods in the past. The reason is that often cycles occur where they can look to the past for performance while comparing current statistics that match those in previous years. That is exactly what is happening in the banking sector now, and the analysts at RBC say that the bank stocks need to be bought and owned now.
The RBC team notes in a new research report that the set-up for the banking sector is very similar to the period from 1994 to 1998. During that time, which had some outstanding years for the S&P 500, the banks produced solid outperformance. With the Federal Reserve apparently done cutting interest rates, the similarity between then and now is striking.
The analysts noted this in the report:
The Federal Reserve indicated that it would not engage in further interest rate increases for the remainder of 2019. While the Federal Reserve’s decision comes on the heels of sluggish economic reports, we remain constructive on the overall macro picture, and contend that banks are positioned to perform well in the current environment. We believe that for many market participants, current expectations are anchored in the recency of the 2004-2006 period, despite the dissimilarity of the current period with the former, in our view. Looking back at prior interest rate cycles, we believe the current environment shares more in common with 1994-1998 than 2004-2008.
While the RBC analysts like the entire sector now, these five top companies are the favorites. All are rated Outperform.
Bank of America
The company posted solid third-quarter results and is one of the top picks across Wall Street now. 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 some 5,100 banking centers, 16,300 ATMs, call centers and online and mobile banking platforms.
The bank reported that third-quarter net income rose 4% to $7.5 billion. The adjusted net income of $0.56 a share exceeded the consensus estimate of analysts surveyed by Refinitiv. Three of the bank’s four main divisions reported gains in revenue, led by its global banking business, with an 8% increase to $5.2 billion on higher investment banking fees.
Bank of America investors receive a 2.17% dividend. The RBC price target for the shares is $35, and the Wall Street consensus price target is $33.58. The stock closed Thursday at $33.23.
This top bank has rallied since earnings were reported, but it is still offering a stellar entry point. 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 8.6 times estimated 2020 earnings, this one looks very reasonable in what remains a pricey stock market. A continuing stock buyback program at the bank is a strong positive. In addition, the company reported third-quarter earnings and revenue that topped projections as stronger-than-expected trading results made up for weaker lending margins.
Citigroup investors receive a 2.69% dividend. RBC has a $76 price target, though the consensus target is $83.56. Shares closed at $75.81 on Thursday.