Seven bank-stock picks as industry nears 'positive inflections'

By Philip van Doorn

Analysts at Oppenheimer expect large banks' net interest income and investment-banking fees to rise

There are always doom-and-gloom warnings in the financial media that the stock market is headed for a tumble, regardless of market conditions. These days, some warnings center on stock valuations appearing to be high relative to expected earnings compared to historical levels. But the banking industry nearly always trades relatively low relative to the broader market. And there may be two broad catalysts to push bank stocks higher over the next year, according to analysts at Oppenheimer & Co.

In a report on Tuesday, the analysts, led by Chris Kotowski and Kevin Tripp, named seven stocks of large banks they expect to benefit from two "coming inflections" that are "largely unrelated."

The first negative trend Kotowski and Tripp expect to see reverse is the decline in net interest income - the difference between what banks earn on loans and investments and what they pay for deposits and borrowings. The trend over the past four quarters has been for net interest income to go down, but they expect this to reverse by the third quarter of this year.

The second negative trend the analysts expect to reverse is the weakness in investment banks' fee income. "[W]e would expect investment banking revenues to start normalizing, and that normalization will probably be greater than consensus expects," they wrote. The consensus refers to average estimates among analysts working for brokerage firms.

The Oppenheimer team conducted a detailed analysis of the investment banking industry and set its estimates based on the size of the potential "spending wallet" for I-banking relative to U.S. GDP, and on recent market-share trends.

The tradition among analysts working for brokerage firms is to set 12-month price targets for the stocks they cover. At Oppenheimer, the price targets are for 12 to 18 months. For Kotowski and Tripp, the top pick among the banks is Goldman Sachs & Co. (GS), which they believe will have "great leverage" to the broad improvement in the investment banking industry. They also believe that Goldman "putting up a few uneventful quarters after the repeated clean up charges in 2023 will help the multiple." That means they expect to see Goldman trade higher relative to rolling earnings-per-share estimates and to book value.

The analysts' second-favorite pick is Citigroup Inc. (C), which has stood out for years as the cheapest of the large banks relative to book value and earnings estimates. They expect Citi's efficiency improvement to "set up for some good quarters back to back," and point to the bank's investor day scheduled for June 18, which has probably been scheduled because its management believes it has "a good story to tell."

Here's a summary of the seven large bank stocks favored by Oppenheimer analysts, with their price targets, along with the stocks' dividend yields:

   Company                               Ticker   April 29 price  Oppenheimer price target  Implied 12 to 18-month month upside potential based on Oppenheimer's price target  Dividend Yield 
   Goldman Sachs Group Inc.                GS            $430.81                   $517.00                                                                                20%           2.55% 
   Citigroup Inc.                          C              $62.26                    $86.00                                                                                38%           3.41% 
   Bank of America Corp.                  BAC             $37.55                    $46.00                                                                                23%           2.56% 
   Jefferies Financial Group Inc.         JEF             $43.68                    $56.00                                                                                28%           2.75% 
   JPMorgan Chase & Co.                   JPM            $193.28                   $217.00                                                                                12%           2.38% 
   Morgan Stanley                          MS             $92.11                   $105.00                                                                                14%           3.69% 
   U.S. Bancorp                           USB             $41.29                    $54.00                                                                                31%           4.75% 
                                                                                                                                                          Sources: Oppenheimer & Co., FactSet 

And here's a summary of consensus opinion among analysts polled by FactSet:

   Company                          Ticker   Share "buy" ratings  Share neutral ratings  Share "sell" ratings  April 29 price  Consensus price target  Implied 12-month upside potential based on consensus price target 
   Goldman Sachs Group Inc.           GS                     69%                    31%                    0%         $430.81                 $447.13                                                                 4% 
   Citigroup Inc.                     C                      67%                    33%                    0%          $62.26                  $68.56                                                                10% 
   Bank of America Corp.             BAC                     44%                    52%                    4%          $37.55                  $39.75                                                                 6% 
   Jefferies Financial Group Inc.    JEF                     75%                    25%                    0%          $43.68                  $50.33                                                                15% 
   JPMorgan Chase & Co.              JPM                     71%                    25%                    4%         $193.28                 $210.09                                                                 9% 
   Morgan Stanley                     MS                     36%                    64%                    0%          $92.11                  $99.17                                                                 8% 
   U.S. Bancorp                      USB                     44%                    56%                    0%          $41.29                  $47.19                                                                14% 
                                                                                                                                                                                                         Source: FactSet 

Click on the tickers for more about each company.

Click here for Tomi Kilgore's detailed guide to the wealth of information available for free on the MarketWatch quote page.

Valuation charts

Here's a chart showing how the aggregate forward price-to-earnings valuation for 14 large banks in the S&P 500 SPX (excluding Goldman and Morgan Stanley) has moved relative to the full index over the past 10 years, as compiled by FactSet:

And this chart shows the aggregate for four investment banks (Goldman, Morgan Stanley, Charles Schwab Corp. (SCHW) and Raymond James Financial Inc. (RJF)) relative to that of the full S&P 500:

These industry valuations are in line with their 10-year averages, relative to the S&P 500, but at times they have been much higher than the current levels.

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-Philip van Doorn

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04-30-24 1051ET

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