Morgan Stanley has upgraded these bank stocks.
Bank stocks have been red-hot in the past three months amid a broad market rotation out of high-growth tech stocks and into value stocks. Fortunately for bank stock investors, Morgan Stanley analyst Betsy Graseck says the favorable environment for banks will continue in 2021. She says rising 10-year Treasury yields will boost bank margins. In addition, loan growth recovery and falling unemployment numbers will serve as revenue catalysts for the banks. Finally, Graseck says many banks that suspended share-buyback programs will resume them in the near future. Here are seven bank stocks Morgan Stanley just upgraded.
Synchrony Financial (ticker: SYF)
Graseck says the private label credit card business has been one of the best segments of the consumer finance industry in recent months, which is good news for Synchrony Financial. Net charge-offs and delinquencies are down nearly 2% year over year in the most recent month, according to Graseck. She says investors should expect a rebound in employment to provide support and stability to the credit market. Synchrony also has high growth potential thanks to the company’s exposure to Amazon.com (AMZN), PayPal Holdings (PYPL) and other tech leaders. Morgan Stanley has an “overweight” rating and $51 price target for SYF stock.
Capital One Financial Corp. (COF)
Graseck says Capital One Financial has a relatively high capacity for absorbing excess loss as a percentage of market cap compared with bank peers. Given Morgan Stanley is projecting U.S. unemployment will drop to around 5% by the end of 2021, Graseck is anticipating about $13 per share of excess capital currently on Capital One’s balance sheet will be freed up and returned to shareholders. Graseck says Capital One has more excess reserves than other banks and will likely aggressively ramp up buybacks next year. Morgan Stanley has an “overweight” rating and $131 price target for COF stock.
Regions Financial Corp. (RF)
Graseck says Regions Financial has a very defensive positioning when it comes to hedging and is prepared for any potential economic environment. If interest rates fall further, the bank’s hedges offset pressures on net interest margins. If interest rates rise, Graseck says the company’s fixed-rate loans business will benefit. The stability of Regions’ business will likely lead to earnings multiple expansion over the next four years, according to Graseck. The company also has cost-cutting opportunities given its ongoing Simplify and Grow initiative. Morgan Stanley has an “overweight” rating and $22 price target for RF stock.
Wells Fargo & Co. (WFC)
Wells Fargo has significantly lagged its “big four” U.S. megabank peers over the past decade, and the stock is down nearly 50% in the past five years due in large part to a string of scandals that has negatively impacted investor sentiment. The bad behavior even prompted the Federal Reserve to implement a punitive growth cap. However, Graseck says uncertainty surrounding Wells Fargo’s business mix restructuring efforts are more than priced into the stock given Morgan Stanley is projecting 2023 earnings per share of $4.59. Morgan Stanley has an “overweight” rating and $99 price target for WFC stock.
State Street Corp. (STT)
Graseck says State Street has the most earnings exposure to interest rates of any of the major trust bank stocks and is a great way to bet on rising rates. Morgan Stanley projects each 0.5% increase in 10-year Treasury yields translates to a 7% increase in State Street’s earnings per share potential. State Street also has $1.5 billion in excess capital on its balance sheet, which Graseck says will likely be invested in buybacks once the Fed approves the bank’s capital plan. Morgan Stanley has an “overweight” rating and $88 price target for STT stock.
U.S. Bancorp (USB)
Graseck says U.S. Bancorp could be in the market for an earnings-accretive acquisition given its strong cash position. In the meantime, she says the bank will continue to selectively expand its business and leverage its branch-light, digital model. Graseck says U.S. Bancorp is a great defensive investment due to its low expense ratio, stable and diversified earnings profile and both internal and external growth opportunities. The stock also trades at just 9.4 times Graseck’s 2023 EPS estimate of $4.73. Morgan Stanley has an “equal weight” rating and $57 price target for USB stock.
Bank of New York Mellon Corp. (BK)
Graseck says Bank of New York Mellon’s best selling point is its $3.3 billion in excess capital, which is nearly 10% of the stock’s market cap. Morgan Stanley is anticipating Bank of New York Mellon will be given the green light to resume buybacks as soon as January, which could be a near-term bullish catalyst for the stock. At its current price, the stock is a compelling value as well, trading at just 7.1 times Graseck’s 2023 EPS estimate of $5.61. Morgan Stanley has an “equal weight” rating and $51 price target for BK stock.
Stocks to bank on:
— Synchrony Financial (SYF)
— Capital One Financial Corp. (COF)
— Regions Financial Corp. (RF)
— Wells Fargo & Co. (WFC)
— State Street Corp. (STT)
— U.S. Bancorp (USB)
— Bank of New York Mellon Corp. (BK)
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