US commercial banks are trading at a discount of over 25% with respect to the market as a whole (S&P 500) in terms of PER 2018e. Fundamentals are solid and the Fed’s monetary policy heralds a good performance from their P&Ls in 2018 and 2019. The ROTE is attractive, nearly 14% and the solvency ratio is high with a capital base of around 12.2%.
Bankinter’s favourite US commercial lenders are Bank of America (BoA), JP Morgan (JP) and Citi, while Morgan Stanley (MS) is their bet on the investment banking side.
The business fundamentals – Loan Investment, Interest Margin and Cost of Risk – are doing well. With the exception of Wells Fargo (WF), Q3’17 results have beaten expectations, despite the decline in “trading” income, explained by the low volatility in the markets.
The increase in the stock of credit, the management of margins and cost control have allowed for a 13.8% accumulated rise in profits over the last 12 months.
BoA and JP lead the growth in commercial banking, while WF has lost market share. In Q3’17, we would flag BoA’s good performance and the change in trend for the better at Citi (net attributable profit: +2.3% vs -0.6% previously). On the investment banking side, Goldman Sachs (GS) results reflect the impact of its large exposure to capital markets (net attributable profit: -3.4% vs + 3.1% previously). But MS posted a 6.0% rise in net attributable profit to $4.925 billion in the nine months to September, thanks to restructuring carried out in the past.
The macro environment and the Fed’s monetary policy herald a good performance from the profit and loss accounts in 2018 and 2019. The economy is growing at a rate of 3.1%, the indices advanced regarding activity are at record highs and the unemployment rate – currently at 4.1% – is at levels similar to those in the 1970s. According to Bankinter analysts:
The basic conditions are there for a sustained rise in the demand for credit, particularly in the SME and private segment. The expected hike in interest rates facilitates an improvement in revenues of those banks which are more dependent on retail business like BoA and JP.
The outlook for EPS growth for 2018 is good (+12.5% in Commercial Banking and +11.3% in Investment Banking), the sector’s ROTE is attractive (14% in Commercial Banking) and solvency ratios are high (a capital base of 13.4% for the sector as a whole).
We think the valuation multiples are attractive (12,6x P/E 2018e in Commercial Banking and 13,6x in Investment Banking vs 17,6x for the S&P 500). And we expect the sector to perform well in 2018.
And finally, the experts’ favourite lenders are those most exposed to retail banking (Commercial Banking), due to their heightened sensitivity to interest rates to the detriment of the investment banks. Their P&Ls are more volatile. Their favourite banks are in this order: BoA and JP for their results outlook, Citi for its capacity to improve its dividend yield – currently at 1.9% – and MS for the expected rise in ROTE.
*Imagen: D Ramey Logan
