Analysts see big upside for these undervalued bank stocks.
After a rough year in 2022, bank stocks are off to a hot start to 2023. Inflation is cooling, and investors are growing increasingly optimistic the Federal Reserve can navigate a “soft landing” for the U.S. economy. Bank stocks typically thrive when interest rates are high, but only if the U.S. can avoid a recession. Higher rates boost banks’ net interest margins, or NIM, and increase their profitability, but a slowing economy can weigh on overall loan growth. Here are 10 of the best bank stocks to buy in 2023, according to Bank of America analysts.
J.P. Morgan Chase & Co. (ticker: JPM)
J.P Morgan Chase is is one of the largest global financial services companies, with nearly $4 trillion in assets. Analyst Ebrahim Poonawala says investors seem to be dismissing J.P. Morgan’s cautious guidance for 2023 net interest income, or NII. Poonawala says higher-than-expected interest rates and a delayed Fed pivot to rate cuts pose a “significant risk” to loan growth, credit quality and NIM, but J.P. Morgan’s potential for a staggering $12 billion in share buybacks in 2023 offsets that risk. Bank of America has a “buy” rating and $153 price target for JPM stock, which closed at $141.92 on Feb. 6.
Wells Fargo & Co. (WFC)
Wells Fargo is one of the largest U.S. banks, lending mostly within the U.S. market. Poonawala says investors also seem to be shrugging off Wells Fargo’s guidance for NII weakness in 2023. He says the bank is on track to reach its long-term goal of sustained 15% return on tangible common equity, or ROTCE. After reducing gross expenses by $7.5 billion over the past two years, management expects another $3.2 billion in cost cuts in 2023 as it continues its efficiency initiative. Bank of America has a “buy” rating and $52 price target for WFC stock, which closed at $47.68 on Feb. 6.
Citigroup Inc. (C)
Citigroup is a diversified financial company that provides a wide range of banking and other services to global customers. Poonawala says he understands investors’ skepticism about Citigroup’s ongoing transformation plan given the bank’s poor execution over the past two decades. However, he says the stock is extremely undervalued, priced at just 9.5 times his 2023 earnings estimate. In fact, Poonawala says Citigroup has potential for $10 in earnings per share in 2025. In addition, the sale of Citigroup’s Banamex Mexico business could be a near-term bullish catalyst. Bank of America has a “buy” rating and $60 price target for C stock, which closed at $50.86 on Feb. 6.
M&T Bank Corp. (MTB)
M&T Bank is a U.S. regional, commercial-focused bank offering banking, trust and investment services primarily in the Northeast and Mid-Atlantic regions. Through early February, M&T is the only stock on this list that is down in the past three months, although shares are up 8.7% in 2023 through Feb. 6. That said, Poonawala says M&T has an attractive risk-reward profile and the bank is well-positioned to navigate a potential economic slowdown in 2023. Bank of America has a “buy” rating and $168 price target for MTB stock, which closed at $157.78 on Feb. 6.
First Republic Bank (FRC)
First Republic Bank is a U.S. regional bank that offers private consumer and business banking and private wealth management primarily in New York and California. Unlike other banks, Poonawala says interest rate cuts will actually provide relief for First Republic’s NIM by lowering deposit costs. In addition, he says signs of a U.S. recession in 2023 would help First Republic outperform given its “pristine” credit qualities. Bullish catalysts include a recovery in NIM, superior growth potential and a simpler business model relative to other growth banks. Bank of America has a “buy” rating and $140 price target for FRC stock, which closed at $142.27 on Feb. 6.
Fifth Third Bancorp (FITB)
Fifth Third Bancorp is a U.S. regional bank that offers retail and commercial banking, consumer lending and asset management services in the Midwest and Southeast regions. Poonawala says Fifth Third’s earnings may prove more defensible than investors are anticipating in 2023, and the company’s attractive geographical footprint in higher-growth markets provides unique opportunities in manufacturing reshoring and solar lending. Poonawala projects 2023 NIM of 3.38%, up 0.03% from fourth-quarter levels. He also anticipates about $1 billion in share buybacks this year. Bank of America has a “buy” rating and $38 fair value estimate for FITB stock, which closed at $37.24 on Feb. 6.
Citizens Financial Group Inc. (CFG)
Citizens Financial is a U.S. regional bank that operates in 11 states in the Northeast, mid-Atlantic, and Midwest regions. Poonawala says Citizens management is prioritizing generating positive operating leverage and optimizing the bank’s balance sheet. In fact, the company recently raised its medium-term ROTCE target to between 16% and 18%. Poonawala says Citizens shares offer an attractive risk-return profile given $400 million in quarterly buybacks and EPS upside potential. He also projects the bank’s efficiency ratio will improve to 55.5% in 2023. Bank of America has a “buy” rating and $47 fair value estimate for CFG stock, which closed at $43.78 on Feb. 6.
KeyCorp (KEY)
KeyCorp is a U.S. regional bank that provides consumer and commercial banking services, including real estate capital and investment banking, in the West, Midwest and Northeast regions. Poonawala says the defensibility of KeyCorp’s NII is key to the stock’s outperformance potential. He says KeyCorp’s valuation is discounting overly pessimistic downside risk to the company’s NII guidance. Poonawala projects a 2% drop in fee revenue in 2023 but says fee revenue could exceed expectations if a Fed pause triggers a rebound in investment banking activity. Bank of America has a “buy” rating and $20 price target for KEY stock, which closed at $19.78 on Feb. 6.
SVB Financial Group (SIVB)
SVB Financial is a specialized U.S. regional commercial bank that focuses on technology, life sciences, wineries, private equity and venture capital firms. SVB shares are down substantially in the past year, but the stock is off to a hot start to 2023. Its 37.4% year-to-date gain through Feb. 6 dwarfs the 2023 returns of other banks on this list. Poonawala says SVB has passed the point of maximum pressure on its NII, and its next bullish catalyst could be a Fed tightening pause. Bank of America has a “buy” rating and $300 price target for SIVB stock, which closed at $316.13 on Feb. 6.
East West Bancorp Inc. (EWBC)
East West Bancorp is a regional commercial bank that has locations in both the U.S. and Greater China, providing consumer and commercial services in the Asian American community. Poonawala says investors do not fully appreciate East West’s best-in-class execution. East West’s exposure to China has been an overhang for the stock in recent years. However, Poonawala says geopolitical tensions and regulatory pressures in China have had a minimal impact on East West’s business, and the reopening of the Chinese economy could help improve investor sentiment. Bank of America has a “buy” rating and $95 price target for EWBC stock, which closed at $78.29 on Feb. 6.
10 bank stocks to buy for 2023:
— J.P. Morgan Chase & Co. (JPM)
— Wells Fargo & Co. (WFC)
— Citigroup Inc. (C)
— M&T Bank Corp. (MTB)
— First Republic Bank (FRC)
— Fifth Third Bancorp (FITB)
— Citizens Financial Group Inc. (CFG)
— KeyCorp (KEY)
— SVB Financial Group (SIVB)
— East West Bancorp Inc. (EWBC)
More from U.S. News
10 of the Best Stocks to Buy for 2023
What’s the Best Cryptocurrency to Invest in Now? 6 Contenders
2023’s 10 Best-Performing Stocks
10 of the Best Bank Stocks to Buy for 2023 originally appeared on usnews.com
Update 02/07/23: This story was previously published at an earlier date and has been updated with new information.
