Banks Could Outperform Broader Markets in 2019



Banks’ momentum

The top five US banks (XLF) reported their fourth-quarter results last week. Since the results, the stocks have been showing a strong uptrend. Bank of America (BAC) and Goldman Sachs (GS) outperformed analysts’ estimates, which drove their stocks higher. Citigroup (C) and Wells Fargo (WFC) reported mixed results. JPMorgan Chase (JPM) reported weaker-than-expected fourth-quarter results.

Most of the banks are expected to benefit from growth in the net interest income due to higher loans and deposits, which is driving their stocks higher. Operating leverage and share repurchases will likely support the bottom-line growth.

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These banks are trading at low valuation multiples, which makes them an attractive bet. Citigroup, Goldman Sachs, Wells Fargo, Bank of America, and JPMorgan Chase are trading at forward PE ratios of 8.4x, 8.2x, 10.1x, 10.2x, and 10.5x, respectively. They offer current dividend yields of 2.9%, 1.6%, 3.5%, 2.1%, and 3.1%, respectively.

Among the top five banks, Citigroup, Bank of America, and JPMorgan Chase are expected to maintain the strong momentum in 2019 even in the absence of a rate hike. Goldman Sachs had an impressive performance in the fourth quarter. However, analysts expect the top line to remain weak in upcoming quarters. Also, the 1MDB scandal could hurt the bank. Wells Fargo’s revenues are expected to decline in upcoming quarters due to the slowdown in loans.

Strong start in 2019

For the top five banks, the stocks have been strong in 2019. The stocks have outperformed the broader markets (SPX). Citigroup, Goldman Sachs, and Bank of America shares have risen 21.2%, 21.2%, and 18.9%, respectively. Wells Fargo and JPMorgan Chase stocks have risen 8.5% and 7.1%, respectively. So far, the S&P 500 has risen 6.5% in 2019.


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