Financial stocks have not performed well this year, with the KBW Bank stock index having fallen 15.5% since the start of the year. That compares with a 14.3% drop for the S&P 500.
But weakness in financials could provide buying opportunities.
“The macroeconomic backdrop for financial sector stocks has been challenging year-to-date,” Wells Fargo analysts, led by Mike Mayo, wrote in a commentary.
This context is “driven by significant volatility in stock markets and interest rates, [downward]- revised GDP forecasts, … supply chain issues, high gas prices and “overseas uncertainty created by the war in Ukraine”, they said.
But they offered five stocks in financial sectors that have become “more compelling given recent moves”.
Large Cap Banks: Bank of America
“Bank of America (BAC) – Get the Bank of America Corp report is our top pick among large-cap banks,” the analysts wrote. “We estimate a 40% increase [for the stock]assuming one-third chance of recession.
“What is underestimated is the degree of growth in BofA’s net interest income (NII), estimated at 50% over the next three years, analysts said.
“BAC reflects our theme of ‘NII to the Sky’ more than any other major bank,” the analysts said. “And that theme is further aided by the acceleration in loan growth [during the second quarter] in a period of higher rates.
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Mid Cap Banks: Signature Bank
“Signature bank (SBNY) – Get signature bank report remains our top choice among mid-cap banks, as its growth, asset sensitivity and credit quality continue to be street discounted during this period of uncertainty,” the analysts said.
“We expect the benefits of its multi-faceted business model to continue to emerge, making the current price-to-earnings ratio of 7.3 times 2023 earnings estimates and price-to-book ratio of 179% an opportunity for growth. attractive purchase.”
Insurance: Arch Capital
“Capital of the Ark (ACGL) – Get the Arch Capital Group Ltd report. is a game in the property and casualty insurance and reinsurance markets, as well as the mortgage insurance space,” the analysts said.
“On the P&C side, a hallmark of the business since its founding has been its ability to opportunistically enter and exit markets based on the most attractive current opportunities.”
As for mortgage insurance, “credit remains strong and supports good corporate profitability,” analysts said.
Specialized financing: American Express
“Our top choice American Express (AXP) – Get American Express company report is oversold around recession and wealth effect fears,” the analysts said. “The shares are trading at 14 times our earnings estimate for 2023. [That’s] well below the 18 times we believe warranted for this high return on equity business.
Additionally, “we believe AXP continues to build its moat around the affluent card member,” the analysts said. This brings “a hard-to-replicate set of benefits such as top-notch service, hotel/airline partners, and airport lounges.”
Asset managers: Apollo Global Management
Apollo (APO) – Get the report from Apollo Global Management Inc. is analysts’ preferred pick, remaining heavily discounted relative to other alternative asset managers at 9x consensus earnings for 2023, analysts said. “This likely reflects APO’s revenue profile (about half) with a heavy insurance component, which we see as creating a good position” in a rising interest rate environment.
“We consider some observers’ concerns about APO’s private equity fundraising success this year to be overstated, particularly in light of the popularity of APO’s value-driven style in the environment. current,” the analysts said.