American Express, Goldman Sachs, Citigroup lead downgrades at BMO as 'banks and specialty finance stocks look vulnerable'
By Steve Gelsi
Analyst James Fotheringham assesses the sector after a big stock runup from October lows against worsening credit conditions
American Express Co., Citigroup Inc. and Goldman Sachs Group Inc. marked the largest of six financial firms to draw downgrades at BMO Capital Markets on Wednesday.
After a rally by banks and specialty finance stocks from October lows, the sector faces headwinds, even if a recession is avoided in 2024, said BMO analyst James Fotheringham.
"Bottom Line: Banks and specialty finance stocks appreciated by almost +40% into year-end (versus S&P 500 SPX ) and now look vulnerable to an impending credit cycle (soft landing or not) and ever-higher capital requirements (from seemingly interminable regulatory pressure)," Worthington said Wednesday.
Credit quality is deteriorating and lenders will likely need to growinto new capital thresholds as proposed by U.S. banking regulators as part of the Basel III endgame.
Citigroup reports its fourth-quarter results on Friday, and Goldman Sachs weighs in on Tuesday.
Also read: JPMorgan, Bank of America lead earnings parade of U.S. largest banks to cap off tough year
Overall, BMO is bearish on banks and specialty finance stocks, but bullish on aircraft leasing companies.
AerCap Holdings NV (AER) ranks as BMO's top buy recommendation and American Express (AXP) is its least-favored stock, Fotheringham said.
BMO cut its rating on American Express Co. to underperform from market weight.
BMO also cut its ratings on Goldman Sachs (GS), Citigroup (C), Capital One Financial Corp. (COF), Synchrony Financial (SYF) and Ally Financial Inc. (ALLY) to market perform from outperform.
Fotheringham zeroed in on the anticipation of an increase in net charge-offs, which is debt owed to a company that's not expected to be paid back.
"All six stocks are sensitive to rising net charge-off (NCO) rates for credit cards and/or prime auto loans," he said.
All told, net charge-off rates for credit cards are expected to increase by about 1.85% and by 0.29% on prime auto loans.
Despite the gloom, BMO pointed out some bright spots in the finance world at the moment.
BMO launched overage of aircraft leasing companies AerCap Holdings and Air Lease Corp. (AL) with outperform ratings.
"Both companies benefit from an air travel industry offering more passengers than seats," he said. "Airline passenger traffic grew +50% last year, but aircraft manufacturing is down -40% since the pandemic."
For its part, AerCap has been benefitting from the supply-demand mismatch by selling assets at meaningful book value premiums and using sale proceeds to repurchase its shares below book value, he said.
Affirm Holdings Inc. (AFRM) and SoFi Technologies (SOFI) were initiated with market perform ratings as part of BMO's specialty finance focus.
BMO also launched coverage of Enova International Inc. (ENVA) and Bread Financial Holdings Inc. (BFH) with market perform ratings.
Also read: JPMorgan's stock upgraded, Wells Fargo's stock downgraded at Deutsche Bank ahead of earnings results
-Steve Gelsi
This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
01-10-24 1106ET
Copyright (c) 2024 Dow Jones & Company, Inc.-
5 Undervalued Stocks to Buy to Play a Little Defense
-
Markets Brief: AI Leaders Excel In Earnings Season So Far
-
What History Tells Us About the Fed’s Next Move
-
What’s Happening In the Markets This Week
-
Alphabet’s New Dividend: What Investors Need to Know
-
Going Into Earnings, Is Palantir Stock a Buy, a Sell, or Fairly Valued?
-
Going Into Earnings, Is Eli Lilly Stock a Buy, a Sell, or Fairly Valued?
-
What’s the Difference Between the CPI and PCE Indexes?
-
After Earnings, Is Tesla Stock a Buy, a Sell, or Fairly Valued?
-
After Earnings, Is GE Aerospace Stock a Buy, a Sell, or Fairly Valued?
-
3 Good Stocks to Buy with Your Tax Refund in 2024 (Or with Any Extra Money)
-
SoFi Earnings: Revenue Growth Slows on Lower Loan Growth and Higher Credit Costs
-
Tesla: Full Self-Driving Approval In China Supports Our View for Deliveries Growth In 2024
-
Philips Earnings: Firm Reaches $1.1 Billion Settlement Agreement
-
AbbVie Earnings: Next-Generation Immunology Drugs Help Offset Humira Biosimilar Pressure
-
Exxon Earnings: Ignore Earnings Shortfall as Long-Term Growth and Improvement on Track