So far, shares of large US banks have marked stellar growth in 2019. An increase in loans and deposits and higher interest rates in the first half of the year drove banks’ NII (net interest income) and stock prices. A healthy macro environment also supported the upside in bank stocks.
Bank stocks had strong growth in 2019
We think that bank stocks also benefited from a change in investors’ sentiment. Their low valuation at the beginning of the year acted as a support.
Notably, major US banks’ stock prices continued to rise despite the Fed announcing three rate cuts in a row.
Large-cap bank stocks weren’t affected
In general, rate cuts boost economic growth. However, lower interest rates don’t work in banks’ favor. Low short-term rates imply lower spreads for banks and lower margins. We think that the Fed’s dovish stance will likely impact banks’ NII. Notably, most banks have trimmed their NII outlook following interest rate cuts.
However, market participants expected that a rate cut was in the offing. Fed Chair Jerome Powell was under pressure to lower the interest rates. The rate cut announcements didn’t surprise investors. As a result, the shares of these large-cap banks weren’t impacted much and kept rising.
Citigroup stock has risen 51% YTD
Citigroup (C) stock has risen 51% YTD (year-to-date). The stock has outpaced the S&P 500 by a wide margin. For instance, the S&P 500 has risen 28.6% during the same period. Continued growth in loans and deposits, an increase in non-interest revenues, and lower costs demonstrated by improved efficiency are driving Citigroup stock higher.
We expect lower short-term rates to pressure Citigroup’s NII in the coming quarters. However, the bank’s top line could continue to rise due to growth in lending and deposits. During the last quarter, the bank’s end-of-period loans increased 2% YoY (year-over-year) to $692 billion. The end-of-period deposits were $1.1 trillion, which reflects 8% growth YoY.
Besides the growth in loans and deposits, we think that higher non-interest revenues will also support Citigroup’s top line. Meanwhile, cost-savings and share repurchases will likely drive the bank’s bottom-line growth.
Also, Citigroup stock looks attractive on the valuation front. The stock trades at lower valuation multiple compared to most of its peers. For instance, Citigroup stock trades at a forward PE ratio of 9.3x compared to the peer group average of 12.5x.
We think that the valuation gap with peers and double-digit EPS growth expectations could continue to support the uptrend in Citigroup stock.
Analysts’ estimates indicate that Wall Street sees more upside in Citigroup stock. Most of the analysts maintain a “buy” rating on the stock. Analysts have a consensus target price of $86.06 on Citigroup stock, which implies an upside of 9.5%.
Bank of America stock has risen 43%
Bank of America (BAC) stock has risen about 43% YTD. The stock has beat the benchmark index considerably. The uptrend in Bank of America stock is due to its impressive financial performance this year.
While low rates could slow down growth, we think that Bank of America could continue to benefit from credit off-take. Growth in loans and deposits, improved efficiency, and share buybacks will likely cushion Bank of America’s earnings.
However, we think that rate cuts and more competition could pose challenges. Earlier, Bank of America stated that its NII growth rate could soften due to falling interest rates.
Analysts expect Bank of America’s top line to remain subdued in 2020. Analysts project a low-single-digit decrease in the bank’s top line in the first three quarters of 2020.
Wall Street maintains a positive outlook on Bank of America stock. However, analysts’ target price doesn’t indicate more upside.
Analysts have a target price of $35.10 on Bank of America stock, which is almost on par with its closing price on Tuesday.
JPMorgan Chase stock has risen 41%
Shares of JPMorgan Chase (JPM) have risen about 41% YTD. A strong financial performance and investors’ favorable outlook drove JPMorgan Chase stock higher. However, consensus estimates indicate that the bank’s top and bottom-line growth could slow down, which could limit more upside in the stock.
Wall Street’s consensus estimates indicate that JPMorgan Chase’s revenues could decline in the first three quarters of 2020. Lower short-term interest rates could impact the bank’s top line. We think that margin compression and tough YoY comparisons could take a toll on the bank’s bottom-line growth as well.
Analysts’ estimates suggest a sharp sequential deceleration in JPMorgan Chase’s EPS in the first three quarters of 2020. Wall Street expects the bank’s EPS growth rate to fall to low-single-digits in 2020 compared to double-digit growth in 2019.
Recently, KBW (Keefe Bruyette & Woods) downgraded JPMorgan Chase stock from “outperform” to “market perform.” KBW cited the bank’s high valuation as a concern and maintained a conservative outlook.
Notably, JPMorgan Chase stock trades at a higher valuation multiple compared to its peers. The stock trades at a forward PE ratio of 13.0x, which doesn’t look attractive due to the expected low-single-digit growth in its EPS.
Wall Street’s target price of $127.75 implies a downside of 7.1% in JPMorgan Chase stock based on its closing price of $137.58 on Tuesday.