Wall Street’s big banks may not have the sizzle of the tech sector, but several leading value investors and analysts see long-term opportunity in the sector, based on the group’s defensive characteristics, solid fundamentals and solid yields. Here, several contributors to MoneyShow.com highlight their current favorite bank buys.
We have taken some hits with the market this year, but I feel confident the bulk of the selling is behind us; we just need to remain patient. I believe our stocks will generate solid long-term results from current prices, simply given low valuations, return of capital through dividends and share buybacks, and moderate growth from operations.
On June 21, we initially added financial services giant Morgan Stanley
Since then, Morgan Stanley has grown exponentially, with revenue of $59.75 billion last year. The company operates three segments:
- Institutional Securities provides investment banking services, including equity and debt underwriting, and mergers and acquisitions advisory services. This segment accounted for 50% of revenues and 60% of net income in 2021.
- Wealth Management offers brokerage and financial advisory/planning services to individuals and small- to mid-size businesses. Through its 2020 acquisition of E*TRADE, the segment also has a self-directed brokerage service and provides insurance products such as annuities, along with real estate loans. In 2021, this segment accounted for 41% of revenues and 31% of net income.
- Investment Management manages money in a variety of strategies and asset classes for institutional and individual clients. This segment accounted for 9% of revenues and net income in 2021.
The post financial crisis era has been very good to Morgan Stanley. With markets strong, earnings per share increased from $1.25 in 2011 to $8.03 in 2021, with growth across all three segments of the company.
MS also grew book value per share nicely in the period, increasing it from $31.42 to $55.12 even as MS paid a generous dividend. Book Value Growth is important in financials as the increase in net worth is a sign that earnings quality was high and the company has additional net assets to generate a greater amount of future earnings.
The company just released weaker-than-expected results for its second quarter. MS reported second-quarter EPS of $1.39, vs. $1.85 last year, on an 11% decline in revenues. Results were below expectations for $1.56 per share, largely due to an extra ordinarily high amount of regulatory expense related to a specific matter.
Other than that, I think the quarter went pretty much as expected, with investment banking revenues down more than 50% as underwriting dried up. Trading results were the one bright spot, as the company’s clients were active in the volatile market.
Wealth Management provided stability, with operating income flat at $1.55 billion. Even before the financial crisis, Morgan Stanley wanted a bigger presence in fee-based retail investing, stemming from their acquisition of Dean Witter in 1997. Morgan Stanley continued to invest heavily in Wealth Management post financial crisis as it sought greater stability in earnings, and it paid off in the first quarter.
The stock is cheap at its current price, which is well below February’s high of $110. Once markets start to normalize, Morgan Stanley should do very well. Buy below $78. My target is $90. The 3.7% dividend yield will add to total returns.
JPMorgan Chase (JPM), led by Chairman and CEO Jamie Dimon, is one of world’s largest diversified banking firms. It operates a leading global corporate and investment bank and is the second-largest mortgage originator in the United States, after Wells Fargo
We are reiterating our “buy” rating following 2Q results, which included a 54% year-over-year drop in investment banking revenue, but a 22% increase in trading revenues and 19% growth in net interest income. JPM raised its forecast for net interest income to at least $58 billion, up from the $56 billion announced at its Investor Day in May. It also reiterated its operating expense guidance of $77 billion, despite elevated inflation.
Other “Investor Day” goals called for a 17% return on tangible common equity, and plans to hire about 1,300 advisers (from a base of 4,700) by 2025, in line with the company’s goal of boosting wealth management assets to $1 trillion, and a new “buy now, pay later” offering for credit card customers.
Following the results, JPM decided to maintain its quarterly common stock dividend at $1.00 per share in light of higher future capital requirements. Along with the 2Q earnings announcement, management said it was temporarily suspending stock buybacks in order to quickly meet the higher requirements.
We continue to like JPM among the large banks given its better lending growth profile, strong credit card franchise, and expected market share gains in its capital markets businesses. We view the current forward multiple as undervaluing the franchise.
We are lowering our EPS estimates to reflect prospects for a continued subdued investment banking environment. We are also lowering our target price to $145 from $155 to reflect the ongoing compression of P/E multiples during a period of high inflation and increased economic uncertainty.
After a period of significant outperformance between mid-2020 and mid-2021, JPM shares have underperformed the broad market over the past year, which we believe reflects a moribund investment banking environment and expectations for higher credit loss provisions after a long period of benign provisions or reversals.
Over the past year, JPM shares have fallen 27%, compared to a 13% decline for the broad market. Although the capital markets environment remains weak, the lending business should benefit from the Fed’s aggressive rate hike campaign. JPM trades at a reasonable 9.5-times our 2022 EPS estimate. Our $145 target price (lowered from $155) assumes a multiple of 11.6-times our 2023 forecast.
BlackRock (BLK) is one of the leading investment management companies in the U.S., best known for its expertise in fixed income asset management. The firm had nearly $9 trillion in assets under management as of June 30, 2022, and we think it will continue to gain market share, aided by its significant scale and strong reputation in the marketplace, despite difficult and volatile market conditions.
Our Strong Buy recommendation reflects our view that BLK’s top-tier position in passive investments and strong fund performance will attract assets at above industry-average rates over the next few years, despite competitive pressures and secular challenges within the asset management industry.
We also see healthy growth potential from equity and fixed income ETFs as well as alternative style funds, which will likely enhance BLK’s asset inflows as new funds gain traction. Additionally, we are encouraged by the potential of the small, but growing Aladdin risk management platform, and see this capability as a factor in widening BLK’s competitive moat versus peers.
We forecast EPS of $35.61 in 2022, rising to $42.55 in 2023, versus the $38.22 of EPS BlackRock reported in 2021. Our 12-month target price of $775 is 18.2x our 2023 operating EPS estimate of $42.55 and 21.8x our 2022 operating EPS estimate of $35.61, above the peer average of 14x and supported, we think, by BLK’s consistent, above-peer growth metrics and the increased competitive advantage BLK continues to build, aided by its technology division.
The stock has our highest 5-STAR
Shares of Bank of New York Mellon
BNY benefitted from rising interest rates as net interest margin expanded to 0.89% from 0.76% in the prior quarter. For the full year, the company now looks for net interest income to rise in the low-20% range, which is up meaningfully from its previous expectation of 13% growth.
Waivers on money market fees were down 69% sequentially, and we wouldn’t be surprised to see the waivers eliminated in the near future as short term rates continue to push up with the series of Fed rate hikes. That said, volatile equity and fixed income markets weighed on fee revenue during the quarter, which is now expected to be flat versus a previous expectation of a 4% to 5% increase.
As the largest custody bank, BK has been able to use a sticky client base to generate double-digit returns on tangible equity (hitting 19% in Q2). The stock trades below book value and for less than 10 times NTM earnings estimates, with a dividend yield of 3.4%. Our Target Price for BK sits at $67.
Citigroup (C) is one of the world’s largest banks, with over $2.4 trillion in assets. The bank’s weak compliance and risk-management culture led to Citi’s disastrous and humiliating experience in the 2009 global financial crisis, which required an enormous government bailout.
The successor CEO, Michael Corbat, navigated the bank through the post-crisis period to a position of reasonable stability. Unfinished, though, is the project to restore Citi to a highly profitable banking company, which is the task of new CEO Jane Fraser.
Citigroup reported encouraging second-quarter results. Revenues rose 11% and were about 7% above the consensus estimate. Earnings of $2.30/share fell 19% and were about 39% above the consensus estimate. The company maintained its full-year revenue and expense guidance. Overall, a good report, particularly compared to the dour investor sentiment.
Revenues were boosted by 33% growth in Trade & Treasury Solutions, a crown jewel of the bank which represents 15% of total revenues. Fixed income trading revenues (about 20% of total revenues) jumped 31% as the bank took advantage of investor uncertainty over the direction of inflation and interest rates. Credit card revenues rose 10% due to higher interest rates on higher balances. As expected, investment banking revenues fell sharply (-46%) as deal volumes shrank.
Total loans fell 2% from a year ago while deposits rose 1%. Citi’s loan/deposit ratio, a simple metric that evaluates the bank’s capacity to make loans, is at about 50%, suggesting that the bank could readily fund faster loan growth. The net interest margin expanded to 2.24%, indicating a wider level of profits on its lending compared to the 1.97% margin a year ago.
Credit quality remains sturdy as credit losses fell 36% from a year ago. The bank’s CET1 capital level rose to 11.9% from 11.8% a year ago despite sizeable dividends and share repurchases. This capital is supported by loan loss reserves that are a generous 2.4% of funded loans.
Citi shares trade at 64% of tangible book value. This immense discount, which assumes a dim future for Citi, appears to be misplaced.
The spread between the 90-day T-bill and the 10-year Treasury note, which approximates the drivers behind Citi’s net interest margin, recently narrowed by 43 basis points to 0.53%. There are 100 basis points in one percent. Short-term rates jumped this past week on conviction that the Fed will continue to ratchet up interest rates to fight high inflation. Long-term rates ticked up modestly.
A recession would likely increase Citi’s credit losses, a flatter yield curve would weigh on its net interest margin, and weaker capital markets would mean fewer investment banking revenues.
Citi shares jumped 11% following the encouraging earnings report and about 66% upside to our $85 price target. Citigroup investors enjoy a 4.0% dividend yield and perhaps another 3% or more in annual accretion from the bank’s share repurchase program once it reaches its new target capital ratio and if a slowing/stalling economy doesn’t meaningfully increase its credit costs. We rate the stock a buy.