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Buckingham's Banking Bets

10/31/2016 10:00 am EST


John Buckingham

Editor, The Prudent Speculator

Banks will continue to feel the operating headwinds of a lower-for-longer interest rate environment for some time to come, even if the Federal Reserve raises rates a few times in the not-too-distant future, suggests value expert John Buckingham, editor of The Prudent Speculator.

However, financials have been rallying of late when interest rates have jumped, so we think the Sector offers a nice hedge.

Wells Fargo (WFC) continues to deal with the fallout from the debacle that was created a few years ago when some of its banking employees opened unapproved accounts for often unaware clients.

After an unimpressive showing on Capitol Hill and numerous calls for accountability from the top, Chairman and CEO John Stumpf announced that he would retire after 34 years. There is little doubt that the company has a tough road ahead to rebuild customer and investor trust.

We have further pared our Target Price to $55, but we continue to think the stock is worth substantially more than the current price.

We also note that more than a few companies, especially in the financial sector, have overcome public relations nightmares, and we expect WFC to survive its current transgressions, so we will continue to hold our position, with the 3.4% dividend yield providing a level of comfort. 

PNC Financial (PNC) reported Q3 earnings per share of $1.84, which outpaced investor expectations of $1.77.

The continued low rate environment is still holding the banking concern back, but management seems relatively optimistic about the foundation that is being put in place so that the company can take advantage of a normal operating environment when it returns.

Considering PNC’s capital position, low-cost deposit base, and stable and solid asset quality, we think the stock offers attractive an upside, and we also like the 2.5% dividend yield. Our Target Price for PNC has been nudged up to $114.

JPMorgan Chase (JPM) reported Q3 financial results that beat consensus expectations. While analysts were looking for the banking behemoth to report adjusted EPS of $1.39, the firm posted $1.59 and achieved a 13% return on tangible common equity during the period.

We continue to like that high-quality JPM shares are trading at less than 12 times the next-twelve-month earnings estimates.

We also believe the firm’s diversification, strong positioning in numerous areas, fortress balance sheet and adept leadership make JPM shares a core financial holding. JPM currently carries a dividend yield of 2.8% and our Target Price has been increased to $82.

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By John Buckingham, Editor of The Prudent Speculator

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