After a big year in 2021 and a hot start to 2022, bank stocks have lagged along with the broader market this year. Aggressive Federal Reserve interest rate hikes could set up bank stocks for outsize earnings growth in the next couple of years.
However, exposure to the Ukraine war and the possibility of slowing loan growth have weighed on bank stocks as of late.
As of June 29, Citigroup shares are down 22% in 2022 and down 32% over the last five years. Bank of America analyst Ebrahim Poonawala says Citigroup may have reached "peak pessimism" when it comes to investor sentiment. Citigroup shares trade at just 7 times forward earnings and 0.52 times book value.
Poonawala estimates Citigroup's exit from Asian markets could free up about $6 billion in the capital in the next year, and the sale of Banamex in Mexico could free an additional $4 billion to $5 billion in the capital. Bank of America has a "buy" rating and a $60 price target for C stock, which closed at $47.10 on June 29.
Fifth Third Bancorp is a U.S. regional bank with more than $200 billion in assets that operates primarily in the Midwest and Southeast. Poonawala says Fifth Third's valuation is attractive, with the stock trading at just 8.6 times his 2023 earnings per share estimate.
In addition, he says the bank has significant market share opportunities in the Southeast and potential earnings growth upside from rising interest rates.
Poonawala says Fifth Third management has successfully implemented the bank's clearly defined technology strategy. Bank of America has a "buy" rating and a $46 price target for FITB stock, which closed at $34.21 on June 29.
HSBC is one of the world's largest banking and financial services providers and operates in 66 countries and territories. Bank of America analyst Alastair Ryan says HSBC's business is particularly strong in Asia.
Ryan estimates rising interest rates should boost HSBC's net interest income by $13 billion by 2024, and its low-risk lending approach limits the downside.
HSBC already has a 4% dividend yield, but Ryan estimates the bank will be aggressive with its capital returns and more than double its dividend to 8.3% by 2024. Bank of America has a "buy" rating and a $44.06 price target for HSBC stock, which closed at $33.39 on June 29.
KeyCorp is a U.S. regional bank that specializes in consumer and commercial banking services, such as real estate capital and investment banking. Morningstar analyst Eric Compton says KeyCorp has completely overhauled its business since the 2008 financial crisis, focusing on core banking operations, boosting its credit quality, and reducing its credit-related costs.
KeyCorp's 2016 acquisition of First Niagara also helped the bank significantly improve its operating efficiency. Compton is also bullish on KeyCorp's technology-focused acquisitions, such as HelloWallet, Laurel Road, AQN Strategies, and XUP Payments. Morningstar has a "buy" rating and a $26 fair value estimate for a KEY stock, which closed at $17.49 on June 29.
East West Bancorp is a middle-market lender that specializes in banking trade between the U.S. and China. CFRA Research analyst Alexander Yokum says East West has an exceptionally profitable business.
He says the bank's combination of rapid loan growth and net interest margin expansion creates one of the "most compelling opportunities" in the banking industry.
Yokum projects revenue growth of between 23% and 27% in 2022, and East West's relatively high reliance on net interest income positions it well for rising interest rates. CFRA has a "strong-buy" rating and a $108 price target for EWBC stock, which closed at $66.43 on June 29.
Signature Bank (SBNY)
Signature Bank is a full-service commercial bank that serves private businesses in New York, Connecticut, California and North Carolina. Yokum says Signature Bank has a strong presence in digital banking and loan growth that's above the industry average.
Perhaps more importantly, net interest income accounts for 94% of Signature's total revenue, well above peer average at just 66%. Yokum says this high exposure to net interest income will provide a tailwind for Signature as interest rates rise.
He projects 40% revenue growth for Signature in 2022. CFRA has a "strong-buy" rating and a $390 price target for SBNY stock, which closed at $184 on June 29.
Bank of America had one of the best first-quarter earnings reports among large U.S. banks, and it reported a 52% decline in net loan charge-offs in the quarter – meaning fewer borrowers fell behind on payments.
CFRA analyst Kenneth Leon projects quarterly commercial and industrial loan volume and loan balance growth throughout the remainder of 2022.
In addition, Leon says Bank of America has limited exposure to Russia, and banking trends such as strong consumer spending, high employment, and rising wages are tailwinds.
Leon projects at least 5% revenue growth in 2022. CFRA has a "buy" rating and a $47 price target for BAC stock, which closed at $31.86 on June 29. Source: usnews