Bank stocks have struggled in 2022 amid soaring interest rates, with the KBW Nasdaq Bank Index dropping 30% year to date, exceeding the S&P 500’s 25% slide.
Rising interest rates help banks to some extent, as their rates of return on loans and bonds rise faster than the interest rates they pay for deposits. But higher rates hurt banks by depressing the economy, denting demand for loans and bank services.
With banks starting to report third-quarter earnings this week, Bank of America analysts offered analyses of the major players.
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JPMorgan Chase (JPM)
It’s “finding receptivity after being viewed as a … short for most of this year,” the analysts wrote in a commentary.
A lower stock valuation, “well understood capital challenges, and visibility on 2023 expenses have all created an openness among certain investors to add exposure,” they said.
“While the stock has a history of trading poorly on earnings prints, the stock weakness coming into Friday's results could lead to outperformance, provided we don't get any idiosyncratic negative surprises.”
Wells Fargo (WFC)
It “remains best positioned and among our top long ideas in the group,” the analysts said. “But [investors] will need validation that share buybacks will resume after management surprised investors with no share buybacks in the third quarter.”
Investors will also focus on management messaging for continued expense savings in 2023, they said.
Citigroup (C)
“Citigroup appears oversold at 0.5 times tangible book value,” the analysts said. The bank lacks capital/expense leverage, and near-term earnings visibility is very limited, they said.
“Investors would need to see evidence that management is able to execute on strategic priorities without any major hiccups in order to revisit the stock.”
The strategic priorities include regulatory consent orders, business exits and optimizing capital allocation, the analysts said.
Goldman Sachs (GS)
Its “ability to defend the return on equity (ROE) in light of continued weakness in investment banking is key to supporting our thesis … for a secular re-rating in the stock,” the analysts said.
“Investors will be keenly watching for management comments on the consumer strategy, given the flurry of news reports … suggesting that a strategic rethink is underway,” they said.
“We see it as unlikely that management reverses course on this strategy, a hallmark initiative of CEO David Solomon, but some refinement around the pace of investment spending and growth targets could occur.”
Morgan Stanley (MS)
“MS remains among the most favored names in our coverage universe,” the analysts said. “Strong execution combined with deal-driven synergies and idiosyncratic growth drivers allow continued progress toward its strategic goals.”
That “should keep shareholders satisfied,” they said. “Moreover, MS is well positioned in terms of excess capital to either deploy buybacks or opportunistically gain market share.”
Still, “above-average exposure to the equities business and a prolonged slump in investment banking activity will test ROE resiliency,” BofA analysts said.
