US financial institutions are trading at bargain prices and continue to represent a solid buying opportunity despite near-term market volatility,
said on Friday.
In a research note on Friday, analyst Christos Kotovski said he expects a generally favorable outlook fundamental trends for the US financial sector during the year, and believed that banks could successfully cope in a challenging macroeconomic environment.
“As long as there are no significant credit problems (which we don’t see as a short/medium-term problem), banks are in a much better position than most industries to weather times of market volatility and maintain returns,” he wrote. Financial institutions are “drastically undervalued,” he said.
Banks don’t have to deal with some of the underlying problems that plague other sectors, including physical supply chains, parts shortages or manufacturing bottlenecks, Kotowski wrote.
However, they would be sensitive to a global economic downturn, especially if this is the case halts loan growth, margins or credit quality. But even then, Kotowski said, they won’t be the first group to be affected, nor will they be disproportionately hurt compared to the rest of the market.
Kotovsky continues to recommend
Bank of America
SVB Financial Group
Heading into the second-quarter earnings season, the analyst acknowledged that it was “reasonable to expect some noise,” particularly among investment banks, as results roll in. Income at Jefferies, the first lender of report earnings earlier this week fell 30% year-on-year to $1.37 billion, portending a bleak outlook for other investment banks.
Outside of investment banking, however, he expects business as usual. Many lenders are likely to reaffirm the forecasts they provided in April earnings calls over the next few weeks, he predicted.
Deutsche Bank analyst Matt O’Connor also expects solid second-quarter results from the US banking sector. He said that net interest income is likely to be stable and that loan growth will be strong, but that fear of a potential recession will continue to drag share prices down.
“We believe bank stocks are now priced at 65-75% recession risk,” he wrote in a research note.
Still, while the three-to-six-month outlook remains uncertain, stocks are likely to be higher a year from now, O’Connor wrote. And compared to the S&P 500, banks are trading at a 40% to 45% discount based on expectations for fiscal 2022.
Bank of America
are two of his top picks.
Analysts at Bank of America take a less positive view. Earlier this week, a team of BofA analysts upgraded Goldman Sachs to buy from neutral, saying stocks can offer investors shelter from an economic downturn. However, they clarified that the promotion was not an endorsement of the banking sector. Banks with larger loan portfolios will be hit by a “deteriorating economic environment,” they wrote.
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