5 Bank Stocks to Love in This 'Goldilocks' Economy

Over-the-shoulder shot of a transaction between a bank teller and a customer in a retail bank. The teller is wearing a black suit and receiving a check from the tan-suited customer over the b

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published 11 January 2018

An eventful quarterly earnings season is kicking off for bank stocks such as JPMorgan Chase (JPM) and Wells Fargo (WFC). Thanks to corporate tax cuts, results across the sector are going to be messier than usual, analysts say. But wise investors will ignore the earnings noise and focus on the big picture for the year ahead.

Bottom line: 2018 is expected to be an especially good year for financial stocks, and not just because of lower effective tax rates.

First things first. Thanks to the timing of the passage of a new tax law, accounting rules are forcing some banks to take charges in their fourth-quarter results. Indeed, we’ve already seen some heavyweights come out with big revisions to their 2017 tallies because of changes to the tax code. Goldman Sachs (GS), for example, said in late December that it would take a one-time $5 billion tax hit in 2017, mainly for repatriating earnings held abroad. Citigroup (C) and Bank of America (BAC) also announced large accounting charges related to corporate tax reform.

This earnings season might make things look complicated, but the simple reality is that tax cuts are good for banks. More importantly, economic and financial conditions were quite favorable for banks even before changes were made to the tax code. Analysts at Keefe, Bruyette & Woods say, “This is a Goldilocks economic setting ideal for financial stocks – not too cold to worry about declining (interest) rates ... and not too hot to set the stage for much higher market volatility.”

Against this backdrop, a combination of solid fundamentals, lower effective tax rates and attractive valuations make these five large and midsize bank stocks look like winners, regardless of how this earnings season plays out.

Disclaimer

Data is as of Jan. 11, 2017. Dividend yields are calculated by annualizing the most recent quarterly payout and dividing by the share price. Companies are listed alphabetically.

Bank of America

Market value: $319.3 billion
Dividend yield: 1.6%
Bank of America (BAC, $30.55) said the new tax law should result in a $3 billion accounting charge from writing down deferred tax assets when it reports quarterly results on Jan. 17. That’s a big number, but shareholders have nothing to fear. Indeed, CEO Brian Moynihan has said that tax reform is a good thing for BofA in the long run.

No wonder Bank of America’s shares continue to outpace rivals and the broader market by such a wide margin. BAC shot up 34% in 2017, and analysts expect more outperformance in the year ahead. Analysts at Credit Suisse, who rate shares at “Outperform” (equivalent of “Buy”), say Bank of America’s revenue growth, cost controls and capital efficiency make the stock look attractive in 2018. Over at UBS, analysts expect BofA’s effective corporate tax rate to fall 9.8 percentage points under the new rules.

Bank of America is expected to report fourth-quarter earnings of 44 cents a share, up from 40 cents in the prior-year period, according to a Thomson Reuters survey of analysts. Revenue is forecast to rise a robust 6.5% to $21.54 billion.

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Citigroup

Market value: $199.4 billion
Dividend yield: 1.7%
Citigroup (C, $75.65) isn’t particularly reliant on lower taxes to have a fine 2018. Since the bank derives roughly 55% of its earnings outside of the U.S., UBS figures its effective tax rate will fall only about 5 percentage points under the new rules.

Rather, Citigroup is set to benefit from another year of revenue growth, cost controls, and low cost-of-credit increases, say analysts at Credit Suisse, who rate shares at “Outperform” (buy). In a best-case scenario, CS analysts think shares in Citigroup can hit $99 in the next 12 months or so – a gain of roughly 30% from today’s prices.

Analysts, on average, expect Citigroup’s fourth-quarter earnings to hit $1.20 a share, up from $1.14 a share a year ago, when it reports its most recent results on Jan. 16. The Street projects revenue growth of 1.6% to $17.29 billion for the final three months of 2017.

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Citizens Financial Group

Market value: $22.1 billion
Dividend yield: 1.6%

Investors in regional lender Citizens Financial Group (CFG, $44.90) had a ho-hum 2017. Shares rose almost 18%, but the Standard & Poor’s 500-stock index – the most commonly used benchmark for U.S. stocks – rose just less than 20%.

Happily, analysts expect better things from CFG in the year ahead.

Analysts at UBS, who rate shares at “Buy,” say Citizens Financial is capable of generating better loan growth than rivals this year. Tax reform could lower its effective tax rate by 11 percentage points, UBS adds.

Wall Street’s pros forecast Citizen’s Financial to report earnings of 67 cents per share on Jan. 19. That compares with a year-ago profit of 55 cents, according to data from Thomson Reuters. Revenue, meanwhile, is projected to improve by 6.6% year-over-year to $1.45 billion.

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JPMorgan Chase

Market value: $382.3 billion
Dividend yield: 2.1%

Shares in JPMorgan Chase (JPM, $110.25), a component of the Dow Jones Industrial Average, had an outstanding 2017. JPM stock rose 24% last year to easily beat the S&P 500.

Can the nation’s largest bank by assets do it again in 2018?

Analysts at UBS think so. Indeed, JPM is their favorite pick when it comes to so-called universal banks in 2018 – in fact, it’s the only “money center/universal bank” it gives a “Buy” rating. JPMorgan has earned that nod because of the bank’s ability to drive outsized growth even as industrywide credit growth remains sluggish. UBS expects JPM’s effective tax rate to fall by 9 percentage points once the new tax rules kick in.

The final quarter of 2017 may not be that spectacular, however. Analysts, on average, forecast a 3.5% rise in revenue to $25.18 billion when the company reports results Jan. 12, but JPMorgan’s earnings are expected to come in at $1.69 per share – 2 cents lower than the year-ago period.

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SunTrust Banks

Market value: $32.3 billion
Dividend yield: 2.4%

Shares in regional lender SunTrust Banks (STI, $67.70) rose 18% in 2017 to underperform the broader market, but tax reform should give shares a much-needed tailwind. Management has noted that it could get a cut to its effective tax rate of around 10 percentage points, according to UBS, which rates shares at “Buy.” Analysts are bullish on the bank’s ability to generate strong consumer loan growth and applaud the banks low loan-to-deposit ratio.

Analysts at Zacks Equity Research call shares in SunTrust a “Strong Buy,” based in part on the bank’s strong revenue growth, cost-savings efforts and solid balance sheet.

The Street is looking for a big improvement in SunTrust’s fourth-quarter earnings, due out Jan. 19. Analysts, on average, expect $1.07 per share in profits, up from 90 cents, as well as a 5.6% increase in revenues to $2.31 billion.

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Dan Burrows is Kiplinger's senior investing writer, having joined the publication full time in 2016.

A long-time financial journalist, Dan is a veteran of MarketWatch, CBS MoneyWatch, SmartMoney, InvestorPlace, DailyFinance and other tier 1 national publications. He has written for The Wall Street Journal, Bloomberg and Consumer Reports and his stories have appeared in the New York Daily News, the San Jose Mercury News and Investor's Business Daily, among many other outlets. As a senior writer at AOL's DailyFinance, Dan reported market news from the floor of the New York Stock Exchange.

Once upon a time – before his days as a financial reporter and assistant financial editor at legendary fashion trade paper Women's Wear Daily – Dan worked for Spy magazine, scribbled away at Time Inc. and contributed to Maxim magazine back when lad mags were a thing. He's also written for Esquire magazine's Dubious Achievements Awards.

In his current role at Kiplinger, Dan writes about markets and macroeconomics.

Dan holds a bachelor's degree from Oberlin College and a master's degree from Columbia University.

Disclosure: Dan does not trade individual stocks or securities. He is eternally long the U.S equity market, primarily through tax-advantaged accounts.