One of the first economic stimulus measures the Federal Reserve took earlier this year was to issue two emergency interest rate cuts, dropping rates to near 0%. While 0% rates are great for companies looking to borrow money to grow, many banks rely on interest rates to support net interest margins and profits. When interest rates are at 0%, banks can't profit as efficiently from their loan businesses. Despite 0% rates, there are still plenty of bank stocks worth buying, according to CFRA analysts.
JPMorgan Chase (JPM) is one of the largest financial services companies in the world and has more than $2.6 trillion in assets. Analyst Kenneth Leon says JPMorgan is his top stock pick among large U.S. banks in a difficult climate of contracting margins and potential loan losses as well as challenging loan growth. JPMorgan was a leader in managing nonperforming assets during the last financial crisis. Leon says second-quarter numbers will likely mark the worst of the 2020 downturn, but JPMorgan is poised for a second-half rebound. CFRA has a "buy" rating and $115 price target for JPM stock.
HSBC Holdings (HSBC) is an international banking group with operations in Asia, the U.K., the Middle East and the Americas. Analyst Firdaus Ibrahim says the bank's near-term outlook will be challenging, but HSBC management has taken all the right steps to weather the storm. HSBC has suspended its dividends and buybacks and implemented cost controls to offset revenue declines. Ibrahim says HSBC shares are trading near their lowest valuation of the last decade, and the company's 2022 profitability initiative will be resumed once the economic outlook is more clear. CFRA has a "buy" rating and $31 price target for HSBC stock.
Although it has scaled down its business tremendously since 2008, Citigroup (C) remains one of the largest banks in the world. Citigroup's balance sheet is in much better health today than 12 years ago, and Leon says the stock has one of the most compelling valuations and capable management teams in the banking group. He says Citigroup's geopolitical diversification will help mitigate risk during this period of uncertainty. In addition, Citigroup shares trade at just 6.3 times Leon's projected 2021 earnings per share. CFRA has a "buy" rating and $70 price target for C stock.
U.S. Bancorp (USB) is the fifth-largest U.S. commercial bank. Analyst Pauline Bell says U.S. Bancorp's initiative to close underperforming branches and focus on technology-driven digital banking will improve its efficiency over time. U.S. Bancorp expects to reduce total branches by at least 10% by the first quarter of 2021. While it reduces its footprint in certain markets, U.S. Bancorp looks to expand in markets such as the Southeastern U.S. and Texas. Bell is projecting $2.81 in earnings per share in 2020. CFRA has a "buy" rating and $40 price target for USB stock.
Fifth Third Bancorp
Fifth Third Bancorp (FITB) is a large U.S. regional bank that operates primarily in the Midwest and the Southeast. Bell says Fifth Third has a diversified business model and an attractive valuation. It also generates a substantial amount of fee revenue, which is somewhat insulated from falling interest rates. The bank's hedging strategies could also help support its net interest margins. Fifth Third is gaining market share and has the opportunity to offset the effect of falling rates by modifying its investment strategy, according to Bell. CFRA has a "buy" rating and $22 price target for FITB stock.
Bank of America Corp.
Bank of America (BAC) is another U.S. megabank that could be well-positioned in the long term. Leon estimates that a 1% drop in interest rates equates to a $6.5 billion decline in net interest income over the next 12 months. But he anticipates a significant recovery for the company in the second half of the year. In the meantime, he says investors can expect higher allowances for credit losses in the near term after the bank extended more than $2.4 billion in credit to small businesses. CFRA has a "buy" rating and $28 price target for BAC stock.
PNC Financial Services Group
PNC (PNC) is a U.S. regional bank based in Pittsburgh that has roughly $450 billion in assets. Bell says PNC's revenue will likely fall between 2% and 3% this year, given the difficult environment, but PNC should still generate $7.97 in earnings per share in 2020. PNC has both a diverse business and a conservative risk profile, Bell says. In addition, Wall Street legend Warren Buffett owns shares of several large banks, but PNC was the one he was most aggressively buying on the dip in the first quarter. CFRA has a "buy" rating and $112 price target for PNC stock.
ING (ING) is a Dutch financial institution focused exclusively on banking after exiting its insurance businesses. Several reasons to like ING shares at current levels are that the bank has superior profitability, a stronger balance sheet and more operating efficiency than many of its European peers, Ibrahim says. ING's leadership positions in the Netherlands, Belgium and Luxembourg will provide opportunities for the company to combat low interest rates, he says. In addition, the company's digital services will help drive market share growth. CFRA has a "strong buy" rating and $7 price target for ING stock.
Truist Financial Corp.
Truist Financial (TFC) is based in Charlotte, North Carolina, and is the sixth-largest U.S. bank. The company was created in December 2019 by the merger of BB&T and SunTrust. Bell says its 64% increase in net interest income in the first quarter is evidence of the full financial impact of the merger. Fee income was up 40% sequentially, driven by residential mortgage refinancing. But Bell says net interest margin will be tested in the second quarter, given the March rate cuts, Truist's lower-yielding stimulus loans and buildup of liquidity. CFRA has a "buy" rating and $39 price target for TFC stock.
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