Value Investor's Top Bank Bets

08/13/2019 5:00 am EST

Focus: FINANCIALS

Jason Clark

Contributing Editor, The Prudent Speculator

With the S&P 500 near an all-time high, many think that investors are infatuated with U.S. equities; however, data shows that a massive ent sum of money has flowed out of domestic stock funds over the last 4-plus years, asserts Jason Clark, value investing expert and contributing editor to The Prudent Speculator.

Meanwhile, here's a look at several banking and financial stocks on our buy list that have just reported their latest earnings results.

Diversified financial firm Bank of America (BAC) reported another solid quarter of earnings as adjusted Q2 EPS came in at $0.74, versus consensus estimates of $0.71.

Revenue was slightly above forecasts, totaling $23.2 billion. The quarter benefited from a 4% increase in average loan growth (with average consumer and small business loans rising 6%), continued positive operating leverage and strong asset quality, with credit charge-offs remaining low. BAC’s efficiency ratio improved to 57%, from 59%.

CEO Brian Moynihan commented, “Our commitment to responsible growth resulted in the best quarter and first-half year of earnings in our company’s history."

Also, the company’s Board of Directors approved plans to return as much as $37 billion to common stockholders over the next four quarters through an increased dividend and stock repurchases.

The bank plans to increase its quarterly common stock dividend by 20% (from $0.15 to $0.18), beginning in the third quarter of 2019, and it has been authorized to repurchase approximately $30.9 billion in common stock from July 1, 2019 through June 30, 2020.

We continue to be fans of Bank of America and see it as one of our core financial holdings, though the dividend yield is presently only 2.0% (but at the current price the yield will increase to 2.4% when the new dividend rate is in place).

We see numerous long-term opportunities upon which the bank can capitalize, from its large deposit base and consumer lending franchise to its “thundering herd” of Merrill Lynch’s financial advisors and wealth managers. Credit quality remains solid and the stock is trading for just 9.9 times next 12-month estimated earnings per share. Our target price has been inched up to $42.

Shares of regional banking powerhouse BB&T Corp. (BBT) inched up following the company’s Q2 results that included both a top- and bottom-line beat of consensus analyst expectations.

BBT reported adjusted EPS of $1.12, versus forecasts of $1.08. Revenue for the period came in at $3.07 billion, slightly above expectations of $3.0 billion. Strong fee income growth and well-controlled expenses offset a lower net interest margin and higher credit costs.

We continue to like the company’s relatively conservative loan underwriting and believe modest loan growth, relatively lower rate sensitivity and fee income growth on increased capital markets activity will bolster near-term results.

We also believe that the union with SunTrust (STI) is a long-term positive, for both companies. The stock yields 3.2% and trades at 11.9 times next 12-month EPS forecasts. Our target brice for BB&T has been boosted to $69.

Consumer finance firm Capital One Financial (COF) earned $3.37 per share in fiscal Q2 2019 (vs. $2.88 est.). COF had sales of $7.1 billion, versus the $7.0 billion estimate.

Capital One had a net interest margin of 6.80% (vs. $6.74% est.), credit card charge-offs of 4.76% (vs. 4.67% a year ago) and credit card delinquencies of 3.15% (vs. 2.88% a year ago). Shares climbed 2.1% following the announcement.

While COF shares have had a nice run thus far in 2019 (up 21% including dividends), we continue to remain long-term focused and we think there is still plenty of upside as the company focuses on managing risks, while improving efficiency, even as it invests to grow and transform itself as banking goes digital.

Capital One currently trades for 8.0 times estimated earnings and offers a 1.8% dividend yield. Our target price has been raised to $125 per share.

Consumer financial firm Synchrony Financial (SYF) earned $0.97 per share in fiscal Q2 2019 (vs. $0.95 est.). SYF had total revenue of $3.4 billion, matching the consensus estimate.

The shares tumbled nearly 3% following the announcement, as investors evidently were concerned by weaker-than-expected net interest income of $4.2 billion (vs. $4.38 billion consensus estimate). Of course, thanks in large part to the company’s PayPal relationship, there was a $418 million year-over-year increase in net interest income.

SYF shares trade at just 8.0 times NTM adjusted EPS consensus estimates and yield 2.4%. SYF continues to execute and we believe that the 49% rise this year is reflective of that. Although the SYF gains this year have been sizable, we think there’s still room to run. Our target price has been lifted to $52.

Diversified bank Citigroup (C) reported adjusted Q2 EPS of $1.83 (vs. $1.80 est.). Despite the bottom-line beat, revenue for the period slightly trailed expectations ($18.41 billion vs. $18.52 billion est.).

Net income not adjusted for one-time items came in at $1.95 for the period as Citi benefited from a pretax gain of $350 million from its ownership in Tradeweb, which recently went public. While overall corporate and institutional banking revenue was flat for the quarter, investment banking revenue fell 10%, but global consumer banking revenue rose 3%.

Citi’s U.S. retail presence lags behind peers in many respects, but the bank has been investing heavily to expand, particularly through digital and mobile banking. Revenue for U.S. consumer banking was up 3%, driven by a pickup in Citigroup’s branded credit cards.

The company continued to reduce operating expenses and return on tangible common equity reached 11.9%, helping to continue to make management’s goal for a full-year number of 12%+ seem quite achievable.

With improving operational execution and business lines in faster growth markets around the globe (vs. its U.S. business), offset by headwinds from the potential for lower interest rates for longer, we believe that Citi shares trade far from fair value, even with a 40% or so total return his year. The stock is priced at just 8.7 times next 12-month adjusted EPS expectations and 90% of book value.

We continue to see a more focused and recapitalized Citigroup as prepared to reward investors over the long-term. We like that C has good leverage towards the solid U.S. economy, while also having the potential to show outsized benefits versus its peers from growth in Asia, Latin America and other emerging economies.

Even though the company faces plenty of operational hurdles in different segments of its business, we think the bank is on its way to achieving its low-50s efficiency-ratio target by 2020.

Additionally, the current dividend yield now stands at 2.8%, and Citi continues to consistently buy back its stock. Our target price for the bank has has been bumped up to $105.

Shares of Fifth Third Bancorp (FITB) jumped sharply after the Ohio-based banking concern reported Q2 financial results. FITB posted adjusted earnings per share of $0.71, beating the average analyst estimate of $0.66. Revenue during the period was $1.93 billion versus forecasts of $1.90 billion.

The bank seems to be delivering on the expense synergies that helped justify the recent MB Financial acquisition and the company realized an improved efficiency ratio during the quarter (58.5%).

Unlike many competitors, adjusted net interest margin expanded, increasing 4 basis points to 3.32%, as the acquired portfolio’s asset yields were higher than the existing portfolio’s yields, which was somewhat impressive given the current rate environment and the possibility of Federal Reserve rate cuts.

Finally, we were also encouraged by the fact that the cost of interest-bearing deposits expanded by only 4 basis points this quarter, seemingly pointing to a strong deposit base across the bank's standalone portfolio and a maybe better-than-expected deposit base for MB Financial.

We continue to believe that the stock is a good regional banking name to own in a diversified equity portfolio, and while the MB Financial acquisition was a bit pricey, the integration seems to be going fairly well and in the long run it should improve the combined company’s operating leverage potential.

The shares are trading at 10.2 times forward earnings estimates and carry a dividend yield of 3.2%. Our Target Price for Fifth Third has been boosted to $41.

Finally, banking giant JPMorgan Chase (JPM) posted Q2 earnings per share of $2.59, versus the $2.50 estimate, as revenue tallied $29.57 billion (vs. $28.88 billion est.). The company’s Tier 1 ratio was 12.1%, while the return on equity was 16%.

We think that JPMorgan Chase continues to execute well, while we remain quite fond of the fortress balance sheet. The shares are currently trading for just 11.2 times next 12-month projections, while carrying a dividend yield of 2.8%.

With the continued progress and momentum, we believe that the financial behemoth is well positioned for the next few years. Our target trice for the stock has been elevated to $139 per share.

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