Analysts expect big things from bank stocks in 2021.
Bank stocks have been among the market’s top performers since the beginning of November. In addition to general optimism about an economic recovery in 2021, bank balance sheets recently got a vote of confidence from the Federal Reserve. The Fed announced banks can resume share buybacks starting in the first quarter. Analysts are anticipating buybacks will help bank stocks continue their recent momentum in the new year. Here are seven banks that could benefit from buying back at least 1% of their total market capitalizations in the first quarter, according to Bank of America analyst Erika Najarian.
PNC Financial Services (ticker: PNC)
Najarian says PNC Financial Services has the highest first-quarter buyback capacity of any bank stock. Najarian is projecting $1.13 billion in net income for PNC in the fourth quarter. After factoring in its 3.1% dividend, Najarian estimates PNC could safely devote $1.31 billion to buybacks in the first quarter, or about 2.1% of its total market cap. However, Najarian says, investors should expect PNC to be conservative with buybacks in the near term following its $11.6 billion buyout of BBVA USA. Bank of America has a “buy” rating and $161 price target for PNC stock.
Bank of New York Mellon Corp. (BK)
Analyst Michael Carrier downgraded Bank of New York Mellon in late November, citing concerns over slowing revenue growth. The bank reported an approximately 1% revenue drop in the third quarter, and Carrier is projecting earnings per share will drop 3.5% in 2021. To combat slowing growth, Bank of New York Mellon may choose to be extremely aggressive with its buybacks. Najarian estimates the company has capacity to safely repurchase $649 million of its own stock in the first quarter, about 1.8% of its market cap. Bank of America has an “underperform” rating and $39 price target for BK stock.
State Street Corp. (STT)
Boston-based financial holding company State Street is another big bank that can be aggressive with buybacks in the first quarter. State Street shares are down about 9% in 2020, but the stock trades at just 1.1 times book value and 6.5 times projected 2021 EPS. Najarian says State Street can safely buy back up to $437 million of its stock in the first quarter, about 1.8% of its total market cap. The buybacks will complement the stock’s 2.8% dividend. Bank of America has a “buy” rating and $77 price target for STT stock.
Goldman Sachs (GS)
Wall Street investment bank Goldman Sachs has held up relatively well in 2020 due, in large part, to its trading business. In the third quarter, Goldman reported a record $3.62 billion in profit, fueled by a 29% increase in trading division revenue. Najarian says Goldman could further boost its EPS in the first quarter by safely repurchasing up to $1.46 billion in stock, about 1.7% of its total market cap. Goldman shares also pay a 1.9% dividend. Bank of America has a “buy” rating and $270 price target for GS stock.
Morgan Stanley (MS)
Shares of investment bank Morgan Stanley have gained about 30% year to date in 2020, making it the best performer among these seven bank buyback stocks. Morgan Stanley’s trading business generated 25% year-over-year profit growth and 16% revenue growth last quarter. Carrier says Morgan Stanley’s market share gains and pristine balance sheet will help the stock outperform in 2021. Najarian estimates Morgan Stanley could safely buy back up to $1.9 billion in stock in the first quarter, about 1.6% of its market cap. Bank of America has a “buy” rating and $70 price target for MS stock.
M&T Bank Corp. (MTB)
M&T Bank is a Buffalo, New York-based bank that has a branch network throughout the mid-Atlantic region. Najarian is projecting $394 million in net income for M&T in the fourth quarter. Even after factoring in its 3.7% dividend, Najarian estimates MTB could safely devote $178 million to buybacks in the first quarter, or about 1.1% of its total market cap. She also says investors shouldn’t be too concerned that the bank’s implied stressed capital buffer doubled in the recent Dodd-Frank Act stress tests. Bank of America has a “neutral” rating and $132 price target for MTB stock.
More than a decade after the 2008 financial crisis, Citigroup is a completely different bank. Citigroup reported a 6% revenue drop and a 34.2% net income drop in the third quarter, but Najarian is projecting 24.7% EPS growth in 2021. Citigroup shares trade at just 0.7 times book value and 11.7 times Najarian’s projected 2021 earnings. She also says Citigroup has the capacity to safely commit $1.32 billion to buybacks in the first quarter, about 1.1% of the stock’s market cap. Bank of America has a “buy” rating and $79 price target for C stock.
Bank stocks expected to perform better in Q1:
— PNC Financial Services (PNC)
— Bank of New York Mellon Corp. (BK)
— State Street Corp. (STT)
— Goldman Sachs (GS)
— Morgan Stanley (MS)
— M&T Bank Corp. (MTB)
— Citigroup (C)
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