How to invest in banks after the midterm elections. U.S. midterm elections are coming up in less than a month, and the balance of power in Congress is at stake. Following President Donald Trump’s election…
How to invest in banks after the midterm elections.
U.S. midterm elections are coming up in less than a month, and the balance of power in Congress is at stake. Following President Donald Trump’s election in 2016, many investors thought bank stocks would benefit from deregulation, tax cuts and rising interest rates. Unfortunately for investors, those catalysts didn’t produce huge gains in bank stocks. Bank of America analyst Erika Najarian says bank stock investors need to be choosy these days. Here are eight bank stocks that could still outperform under Trump.
J.P. Morgan has been one of the top-performing bank stocks over the past two years for good reason. The bank’s research team was just voted best equity research team by institutions for the third consecutive year, according to an Institutional Investor poll of more than 1,300 firms. Najarian says J.P. Morgan is firing on all cylinders but should still be able to generate double-digit earnings per share growth throughout the remainder of Trump’s first term thanks to aggressive share buybacks. Bank of America has a “buy” rating and $132 price target for JPM stock.
Wells Fargo dealt with public relations issues and regulatory enforcement actions since its fraudulent accounts scandal several years ago, but the setbacks haven’t turned Najarian from the stock. The most recent issue, a $2.09 billion settlement with the Department of Justice stemming from legacy mortgage backed securities infractions dating back prior to the 2008 financial crisis, should not derail the bank’s commitment to buying back 10 percent of the stock’s market capitalization. Bank of America has a “buy” rating and $68 price target for WFC stock.
PNC has lagged the market in 2018, but Najarian says that trend could soon reverse course. Najarian expects PNC’s net interest margin to expand to 2.99 percent in 2019 as interest rates continue to rise. PNC’s pre-provision net revenue beat in the second quarter was a positive sign for investors that PNC is managing the relatively flat yield curve effectively. Najarian says the company has shifted focus away from acquisitions and toward improving Basel 3 capital levels and increasing capital returns. Bank of America has a “buy” rating and $168 price target for PNC stock.
Najarian says Comerica is one of the best value opportunities among U.S. bank stocks, especially now that lawmakers removed the company’s “systemically important financial institution” designation. That deregulation freed up a large amount of Comerica’s capital and allowed management to commit $500 million to buybacks in July. The buyback program was nearly twice as large as analysts expected at the time. Despite losing its SIFI designation, Najarian says CMA stock still trades at a similar valuation to other SIFI banks. Bank of America has a “buy” rating and $109 price target for CMA stock.
Zions Bancorp is another company that has shed its SIFI designation but hasn’t seen a meaningful boost to its share price. Zions wasn’t as aggressive as some of its peer group in committing to a buyback plan representing only 2 percent of market cap, but Najarian says the company’s impressive organic revenue growth and steady investments in new offerings demonstrate management is being prudent with its cash. Zion’s FutureCore initiative is aimed at improving customer experience, digitizing operations and better leveraging the bank’s data. Bank of America has a “buy” rating and $62 price target for ZION stock.
Citigroup stock is trading at a 2019 earnings multiple of about 9.5, which Najarian says is well below its 11 historical multiple during periods of rising interest rates. It’s also a better value than the stock’s 11.5 earnings multiple during the period immediately following the 1987 corporate tax cuts. Najarian says Citigroup doesn’t need to hit its target of $9 in EPS by 2020 because the stock is cheap even if it makes it to an EPS in the low $8s. Bank of America has a “buy” rating and $84 price target for C stock.
KeyCorp is another bank stock that is trading at a valuation discount to its historical norms and to its peer group. Najarian says management’s recent progress in lowering core expenses has strengthened KeyCorp’s credibility among investors, which should help the stock eliminate some of that valuation gap. She says KeyCorp could get to $2 in 2019 EPS if the company can improve its cash efficiency ratio to within its long-term goal range of 54 percent to 56 percent. Bank of America has a “buy” rating and $24 price target for KEY stock.
Huntington Bancshares is on track to hit major 2018 financial targets two years ahead of schedule. Najarian says Huntington is consistently within the top five of its peers across all important metrics, yet the stock trades at a discounted earnings multiple to the overall regional bank group. Najarian is forecasting long-term loan growth of 6 percent and NIM of 3.33 percent in the second half of 2018. She says Huntington is the most compelling banking turnaround stock under Bank of America coverage. The firm has a “buy” rating and $18 price target for HBAN stock.