When the market blew up during the great financial crisis of 2007 to 2009, the bank and brokerage stocks were in part ostensibly the reason for the collapse, as they had aided and abetted the mortgage crisis. Two major brokerage firms went out of business, and Merrill Lynch was bought at the last moment by Bank of America before it plunged into the abyss of bankruptcy.
Fortunately, lessons were learned then, and the major banks are in much better shape these days. While net interest income has dropped with rates at historically low levels, and loan growth will slow with the economy still operating at a reduced level, the future is still bright for the top players in the sector. Many are trading at record low levels to their S&P 500 counterparts.
A new research report from Jefferies bank analyst Ken Usdin and his team makes the case that healing for the top financials could start in earnest in 2021, and by 2022, the sector could be in very solid shape. The report noted this:
Banks have struggled for appreciation given low rates, credit concerns, shrinking loans, and election uncertainty. Factors that could flip positive incl. passage of more stimulus, EPS upside from reserve release, and a restart of buybacks. Return on average tangible common shareholders’ equity will improve out to 2020 on lower provisions, but stay below pre-pandemic levels. P/Es’ on 2022 normalized are attractive at <10 times EPS.
Though the Jefferies analysts have seven top picks, here we stay with the large-cap companies as they may offer investors a more conservative way to play an out-of-favor sector. While all three are rated Buy and outstanding ideas for growth investors, it is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.
This leading money center giant has been trading at some of the lowest levels since 2016. 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 7.7 times estimated 2020 earnings, Citigroup stock looks very reasonable in what remains a volatile market and in a sector that has lagged dramatically.
The Federal Reserve Board recently announced an enforcement action against Citigroup that requires it to correct several longstanding deficiencies. The bank has been slapped with a $400 million penalty by the Office of the Comptroller of the Currency for longstanding deficiencies in its risk management and internal controls processes. Both the OCC and the Federal Reserve have accused the bank of failing to implement effective risk and internal controls measures that complement its size, complexity and risk profile.
While this action may seem harsh, for interested investors who have been waiting for the judgment and penalties, it should take some weight off the stock as it does not seem overly punitive to the bank and the decision is finally in.
Investors receive a 4.54% dividend. Jefferies raised its price target to $56 from $52, but that is still lower than the Wall Street consensus target of $65.36. Citigroup stock closed Friday’s trading at $44.93.