Renowned bank-stock analyst Mike Mayo of Wells Fargo has put together a list of some of his favorite picks.
At a recent Wells Fargo banking conference, he outlined some the names he included.
“Large-cap banks showed conviction that core pre-tax operating margins will improve—a contrast to other industries,” he wrote in a commentary.
“What's noteworthy is that, despite the fear in stock prices, the boogeyman was a no-show for all of our meetings.”
The KBW Nasdaq Bank stock Index has dropped 18% year to date.
Here are some large-cap bank stocks rated overweight by May:
Bank of America BAC
This is Mayo’s No. 1 pick.
“BAC checks almost all of our boxes for a favorable bank investment, and this was reinforced by our meeting with the head of regional banking (one-half of the firm),” Mayo said.
“At a time when other companies outside banking are showing shortfalls, BAC should report significantly higher core pre-tax margins over one, two and three years.”
"[Bank of America] resembles a digital bank with a physical presence,” Mayo said.
“Structurally, its cost of deposit is about one-third to one-half better than the next closest competitor. That stems from the strength of its deposit relationships and lower-cost infrastructure.”
Citigroup C
“Our meeting with CFO Mark Mason reaffirmed that Citi's transformation plan seems like a logical, multi-step, self-help progression,” Mayo said.
“In our view, the end state should be a company with a more clear strategy, especially gaining share with multinationals by leveraging its unique global footprint.”
“The problem is the moves take time, and the CFO made clear that expenses are likely to increase again in 2023, (which isn’t new), though we estimate that revenue growth should exceed expense growth during 2023.”
Goldman Sachs GS
“Our meeting with the co-head of investment banking, Dan Dees, reinforces our theme of ‘mergers to the moon,’" Mayo said.
“Structurally, GS — as the No.1 leader in mergers for 19 years —benefits from two defining themes, including the new ‘disruption economy’ and record private equity that equates to new transaction capital.”
"[However] the near term still has headwinds caused by declines in asset prices, increases in volatility, and a pause by clients that may mean deals are further delayed — though not dead,” Mayo said.
Fifth Third Bancorp FITB
“Our meeting with FITB's new CEO Tim Spence and Treasurer Bryan Preston reinforced our more positive view after our recent upgrade,” Mayo said.
“Structurally, the FITB mindset seems to reflect Digital Banking 2.0. FITB's next stage is to create more products that weren’t possible previously when digital banking only meant self-service.”
“Cyclically, the net-interest-income guidance remains at about the highest in the industry, up 13%-14% [for the year],” May said. “This is aided as FITB puts more of its excess cash to work and grows loans, as it seems to be doing quite effectively.”
U.S. Bancorp USB
“Our meeting with USB management reinforces our forecast that USB should show the first repeatable operating leverage improvement in six years,” Mayo said.
“The key point is that the foundational repositioning and restructuring is complete, albeit with continuous investing.”
"[That means the bank] should move to the favorable side of the investing ‘J’ curve,” he said.
“Our meetings addressed about half the company (consumer and small business) and highlighted benefits in mortgage … alliances … integration of small business and payments … customer satisfaction … and ability to leverage past tech investments to 1 million new Union Bank consumers.”
The author of this story owns shares of Goldman Sachs and U.S. Bancorp.
