Top 8 Bank Stocks Poised to Dominate the Market in 2018: Insights from Goldman Sachs
Goldman Sachs highlights seven compelling reasons why financial stocks, particularly banks, are set to outperform the market this year.
Investors are encouraged to increase their exposure to financial stocks, especially banks, driven by seven key market dynamics identified by Goldman Sachs Group Inc. (GS). These factors include rising interest rates, enhanced capital returns to shareholders, ongoing deregulation, robust M&A advisory fees, improving net interest margins, loan growth, and attractive valuations coupled with growth potential. Among the 17 banks evaluated in Goldman's U.S. Weekly Kickstart report dated May 4 are Bank of America Corp. (BAC), Wells Fargo & Co. (WFC), Citizens Financial Group Inc. (CFG), Regions Financial Corp. (RF), Comerica Inc. (CMA), KeyCorp (KEY), PNC Financial Services Group Inc. (PNC), and SunTrust Banks Inc. (STI).
Key Market Metrics
Based on closing prices as of May 9, the year-to-date performance, projected gains relative to Goldman’s price targets, and anticipated increases in capital returns to shareholders for the 12 months ending June 2019 are as follows:
Capital returns encompass both dividends and share repurchases. As of May 9, the S&P 500 Index (SPX) had achieved a 0.9% gain year-to-date. The target gains referenced in the report were based on May 3 prices, with adjustments made to reflect price changes through May 9. (For further insights, see: Top 4 Bank Stocks for 2018.)
Compelling Valuations
The analysis reveals that over the past decade, the financial sector has consistently traded at a discount compared to the broader S&P 500, based on forward price-to-earnings (P/E) ratios (12.7x earnings vs. 16.3x), price-to-book (P/B) ratios (1.5x book value vs. 3.2x), and PEG ratios (0.9x growth vs. 1.0x). When compared to 10-year averages, the current relative valuations of financial stocks remain significantly lower in terms of P/E and PEG ratios, while the P/B ratio is only slightly elevated.
Examining price-to-tangible book (P/TB) ratios, the banks analyzed range from 1.6x tangible book value for Citizens to 2.1x for SunTrust. The report notes, "Share repurchases will reduce the equity base, supporting a higher P/TB ratio than the current median of 2.0x among the 17 banks studied." Additionally, risk has diminished as financial institutions now operate with substantially lower leverage than in the past. However, this conservative leverage approach has resulted in a modest median return on tangible equity (ROTE) of 13% across these banks. (For more details, see: 4 Bank Stocks Expected to Outperform in 2018: Oppenheimer.)
Addressing Loan Growth Concerns
The report acknowledges investor apprehension regarding what is perceived as 'anemic loan growth.' For the top 25 domestic banks, the estimated year-over-year loan growth of 2.6% in 2016 represents the slowest pace since 2014, partly influenced by a 1% contraction at Wells Fargo. On an optimistic note, key drivers such as increased capital expenditure plans, rising M&A activity, and low cash reserves suggest a positive trajectory for loan growth moving forward.
Insights on Mergers & Acquisitions
While M&A activity is highlighted as a catalyst for boosting bank revenues, profits, and stock prices, the focus is not on bank-to-bank mergers. Instead, the report emphasizes a surge in 'corporate actions' across various industries, which is expected to generate higher advisory fees for banks and stimulate lending activities, reinforcing the sector's growth prospects.
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