As we have noted many times, one of the few sectors where companies applaud higher interest rates is the financials. Interest rates and bank profitability are connected. When interest rates are higher, banks make more money by taking advantage of the difference between the interest banks pay to customers and the interest the bank can earn by investing and writing loans.
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The stock market was on pins and needles for a while earlier this year as interest rates edged higher. While a huge increase would be dangerous for some sectors, the reality is the Federal Reserve probably will not raise interest rates for another year or even two. Plus, with the benchmark 10-year Treasury yield drifting back to 1.65%, and finally higher than the S&P 500 yield for the first time in months, it is nothing compared to the 5% yield in 2007.
The bottom line for investors is that it is likely the top large-cap financials will post some solid numbers. So, we screened our 24/7 Wall Street research database looking for money-center banks that are rated Buy and could post some solid results later this week. Four look very attractive and can be bought in front of the reports.
Bank of America
The company posted solid fourth-quarter results and may be set to repeat when it reports Thursday before the open. 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 5,100 banking centers, 16,300 ATMs, call centers and online and mobile banking platforms.
The bank has expanded into a number of new U.S. markets, with scale across the country positioning it ideally to benefit from accelerating loan growth over the next two years. Moreover, unlike smaller peers, scale allows the bank to increase investment substantially over the next few years without notably jeopardizing returns, driving further market share gains.
Bank of America stock investors receive a 1.80% dividend. Barclays has a Buy rating and recently raised the price target to $45 from $40. The $39.98 Wall Street consensus target is in line with Friday’s closing at $39.99.
Citigroup
This top bank stock has rallied nicely but looks poised to move even higher for the rest of 2021, and it is expected to report early Thursday. Citigroup Inc. (NYSE: C) is a leading global diversified financial service company that provides consumers, corporations, governments a broad range of financial products and services.
Citigroup offers services such as consumer banking and credit, corporate and investment banking, securities brokerage, transaction services and wealth management. It operates and does business in more than 160 countries and jurisdictions in North America, Latin America, Asia and elsewhere.
Trading at a still very cheap 9.9 times estimated 2021 earnings, this stock looks very reasonable in what remains a volatile stock market and in a sector that has lagged dramatically.
Investors receive a 2.82% dividend. Jefferies has a Buy rating and raised the price target recently to $85 from $75, while the consensus target is $83.75. Citigroup stock closed Friday at $72.42.
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