Citigroup analyst Keith Horowitz upgraded Wells Fargo to a buy, reiterated a bullish view on M&T Bancorp and cut ratings on five other banks on Monday.
While banks looked poised for outperformance earlier in the year, concerns over a potential economic slowdown, as well as the Ukraine war, have impacted multiples.
The key development from January has been the quick onset of inflation as a rally in bank stocks from last year turned into stock losses thus far in 2022. The Financial Select Sector SPDR ETF XLF,
“What has changed is expectations for a rapid increase in rates, which can be problematic for some banks in the near-term and we are adjusted our ratings to build in a higher margin of safety,” Horowitz said. “Given the increased uncertainty, it becomes relatively easy to draw up a bear case on credit risk and the negative stock price action seems to reinforce the narrative as investors move to the sidelines awaiting more clarity.”
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Citi upgraded Wells Fargo & Co WFC,
Horowitz reiterated buy ratings on Bank of America Corp. BAC,
Citi also initiated a pair trade overweight WFC/underweight US Bancorp USB,
“We believe the faster than expected rising rate environment will magnify balance sheet positioning and in our view Wells Fargo is among the best positioned with strong capital and liquidity, while USB is less asset sensitive so has limited upside on net interest income,” Horowitz said.
M&T Bank Corp remains Citi’s top pick given asset sensitivity, excess dry powder, and share repurchase capacity, he said.
Horowitz cut his ratings to neutral from buy on BNY Mellon Corp. BK,
“While we believe the valuations on these names remain attractive, we move to the sidelines as we believe 2023 earnings per share estimates need to be reset lower and we see limited buyback capacity,” he said.
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