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With bank results due in a few weeks, Bank of America seems to be a winner, but Citigroup’s prospects are less favorable.
Banks face significant geopolitical and economic uncertainty at the moment.
Banks, on the whole, should have a bright future. The Federal Reserve is projected to continue raising interest rates this year, allowing banks to make a higher profit margin on the difference between income earned on loans and interest paid on deposits. However, Wall Street has anticipated an aggressive rate hike cycle for months, implying that any advantages have been built into bank stocks.
What concerns economists and investors alike is that the Fed will raise interest rates too soon, pushing the economy into recession. This comes as the rest of the market assesses the economic consequences of Russia’s invasion of Ukraine. While US banks have relatively little direct exposure to Russia, their customers may face increased commodity prices, affecting US banks.
Barron’s has been advising investors for months to focus on individual banks this year rather than the industry since certain banks are better positioned to manage the present environment. Morgan Stanley analysts reduced their rating on financial stocks to “In-Line” from “Attractive” on Monday. Citigroup (ticker: C) was reduced from “Equal-Weight” to “Underweight,” while Morgan Stanley upgraded Bank of America (BAC) to “Equal-Weight” from “Underweight.”
Due to lax internal controls, Citigroup has been a problematic bank to regulate in recent years. Under the leadership of Chief Executive Jane Fraser, the bank has updated its top ranks and worked to eliminate non-core operations while investing in efficiency improvements. Investor Day was unimpressed by Wall Street earlier this month: analysts indicated support for the bank’s ambition.
Citigroup is the only large bank in the United States that trades below book value, which may make it an attractive proposition for value investors. However, experts assert that there are simply too many variables for the bank to fulfill its objectives quickly.
“In our opinion, Citi’s granular revenue objectives are too aggressive, given they are about twice what we predict for rivals and represent a considerable increase over Citi’s previous performance. Not only does Citi need to execute on multiple fronts (wealth management, treasury and trade services, and personal banking in the United States), it also needs to do so in an environment marked by increased tail risks both domestically and internationally,” Betsy Graseck, an analyst at Morgan Stanley, wrote.
Citigroup shares, she believes, will reach $60 per share, up 6% from current trading levels.
Bank of America seems to be a better choice, given it is the bank most sensitive to interest rate fluctuations and has a robust loan book, according to Graseck.
“BAC’s long-standing commitment to responsible expansion is reflected in its stricter underwriting standards and good credit quality, as indicated by its low loan loss rates in the annual Fed stress test’s extremely unfavorable scenario. This restricts downside compared to peers in a more challenging macro environment with more tail risk,” Graseck said, adding that shares may rise as much as 11% to $49 per share.