Remember how the international banking industry faced stricter regulations after the 2008 banking crisis and recession? Well, the Basel III endgame regulations seem to soon be eased, leading to a more favorable environment for banks.
Previously, banks with $100 billion or more in total assets had to fulfill high levels of capital requirements. However, the final rule set is expected to be less restrictive and aligned with global standards. This means that larger banks will benefit from a lower risk-weighted assets uplift, thanks to their excess capital.
According to Betsy Graseck, Morgan Stanley’s sector expert, the banks are likely to use that excess capital for buybacks. She has even upgraded a couple of major bank stocks, indicating a bright future for the industry. Let’s dive deeper into her recent upgrades and see if these names are worth keeping an eye on.
Goldman Sachs provides a range of banking and credit services to a client base that includes financial institutions, corporations, banks, governments, government agencies, and high-net-worth individuals. The bank’s experts are well-known on Wall Street, and their views on the economy, the stock market, and the international financial scene are frequently in demand, making Goldman a leader in global investment research.
With a market capitalization of over $126 billion and $1.642 trillion in total assets as of December 31 last year, Goldman Sachs occupies a high-prestige niche in the banking world.
Goldman Sachs is not shy about returning capital to its investors. In its most recent financial results, for Q4 and the full year 2023, the bank returned $9.39 billion worth of capital to common shareholders. This return included $5.8 billion in common stock repurchases and $3.59 billion in common share dividend payments. The most recent dividend, worth $2.75, was declared for a March 28 payment.
The bank’s strong performance for 2023 supported the total capital return. Quarterly revenue came to $11.32 billion, up 6.9% and beating forecasts of $10.8 billion. Earnings increased by 65% to $5.48 per share, while analysts were expecting earnings of $3.62 per share.
Analysts predict that Goldman Sachs is particularly well-positioned to benefit from a capital rebound. Analyst Graseck explains that “Goldman is the most exposed in our Large Cap Banks coverage to a capital markets rebound, with 64% of revenues coming from Global Banking & Markets in 2024 in our model. We model Goldman’s M&A advisory revenues increasing by 45% in 2024.”
The consensus on Wall Street is that Goldman Sachs is a Moderate Buy. As of now, shares are trading for $387.86, and their average price target of $425.05 suggests a potential increase of 9.5% in the next 12 months.
Bank of America
Bank of America, one of the top four banks in the US, has a market capitalization of $265 billion and total assets of approximately $3.18 trillion. On January 12, the company released its results for the fourth quarter and full-year 2023. The quarterly revenue figure came to $22 billion, which was a 10.5% year-over-year decrease and missed expectations by $1.77 billion. However, for the year, revenue came to $98.6 billion, which was an increase compared to $95 billion in 2022. BoA posted an adjusted quarterly EPS of 70 cents per share, which beat the forecast by 6 cents.
Bank of America has a long-standing commitment to capital return, which is of particular interest to analysts. During the fourth quarter, the bank paid out $1.9 billion in dividends and spent $800 million on share repurchases. The last dividend payment was declared on January 31, at 24 cents per share. The annualized payment of 96 cents gives a yield of 2.87%.
Analyst Graseck believes that Bank of America’s stock is currently undervalued, as it is trading at only 9x their 2025 EPS. Graseck also notes that Bank of America benefits from a strong consumer deposit franchise, with 92% of consumer checking accounts being primary accounts and 67% of deposit balances being with customers that have been at BAC for more than 10 years.
Morgan Stanley analyst sees potential for Bank of America to hold the line in its business and notes the bank’s sound liquidity potential. The analyst states, “In our view, we see extraordinarily low risk BAC would have to tap unrealized losses in its HTM securities book given the strength, stickiness, and diversity of its growing deposit franchise, ability to increase deposit rates to grow deposit balances if desired, extensive global liquidity sources of $897B, and daily LCR (liquidity coverage ratio) testing as a GSIB (global systemically important banks).”
The consensus rating on Bank of America’s shares is a Moderate Buy, according to the 19 recent analyst reviews. The stock is currently trading at $33.47, and the average target price of $37.36 suggests a potential 12-month gain of 11.5%.
So, what are your thoughts? Do you think it is worth to invest in these bank stocks? Can you think of a better alternative?
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(Information in this post is for general informational purposes only. It cannot and should not be considered as suggestions or recommendations regarding investing or financial decisions.)