Bank of America says lenders with large loan books will be affected as the economy worsens.
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U.S. financial institutions are trading at bargain-basement prices and continue to present a solid buying opportunity despite near-term market volatility, Oppenheimer said on Friday.
In a research note on Friday, analyst Christ Kotowski said he expected generally favorable fundamental trends for the U.S. financial sector over the course of the year, and believed banks could successfully navigate a challenging macroeconomic environment.
“As long as there are not significant credit issues (which we do not see as a near/medium term issue), banks are much better positioned than most industries to manage through times of market volatility and maintain returns,” he wrote. Financial institutions are “dramatically undervalued,” he said.
Banks don’t have to deal with some of the main issues plaguing other sectors, including physical supply chains, parts shortages, or manufacturing bottlenecks, Kotowski wrote.
That said, they would be sensitive to a global economic downturn, especially if that stunts loan growth, margins, or credit quality. But even then, Kotowski said, they wouldn’t be the first group to be affected, nor would they be disproportionately hurt compared with the rest of the market.
Kotowski continues to recommend Bank of America (ticker: BAC), Citigroup (C), Goldman Sachs (GS), Jefferies (JEF), JPMorgan Chase (JPM), Morgan Stanley (MS), SVB Financial Group (SIVB), and U.S. Bancorp (USB).
Heading into second-quarter earnings season, the analyst acknowledged that it was “reasonable to expect some noise,” especially among investment banks, as results roll in. Revenue at Jefferies, the first lender to report earnings earlier this week, slid 30% year over year to $1.37 billion, foreshadowing a gloomy outlook for other investment banks.
Outside of investment banking, however, he expects business as usual. Many lenders are likely to reaffirm forecasts they provided in April earnings calls over the next few weeks, he predicted.
Deutsche Bank analyst Matt O’Connor is also expecting solid second-quarter results from the U.S. banking sector. He said net interest income is likely to be robust and that loan growth will be strong, but that fear about a potential recession will continue to drag stock prices lower.
“We believe bank stocks are now pricing in a 65- 75% risk of a recession,” he wrote in a research note.
Still, while the three- to six-month outlook remains uncertain, stocks are likely to be higher a year from now, O’Connor wrote. And compared with the S&P 500, banks are trading at a 40% to 45% discount based on expectations for the 2022 fiscal year. Bank of America and U.S. Bancorp are two of his top picks.
Analysts at Bank of America see things less positively. Earlier this week, a team of BofA analysts upgraded Goldman Sachs to Buy from Neutral, saying the shares could offer investors shelter from the economic downturn. They clarified, however, that the upgrade wasn’t an endorsement of the banking sector. Banks with larger loan books will be affected by a “worsening economic backdrop,” they wrote.
Write to Sabrina Escobar at [email protected]
