For years, bank stocks have lagged behind the
index. The analysts at Oppenheimer think big banks could narrow the gap.
In their Tuesday note, Chris Kotowski and Kevin Tripp predict the fundamental performance of banks will improve later this year, as interest rates finally ease.
The Oppenheimer team concludes that there’s 25% upside, on average, for big banks like
and
The S&P has left banks in the dust. Since the start of 2018, the KBW Nasdaq Bank Index is down over 6%, while the S&P 500 has doubled in the powerful draft of the big tech stocks like
and
Nvidia
.
The Magnificent Seven top tech names are worth 18% of the S&P’s value.
That makes the S&P the wrong reference for valuing banks, say the Oppenheimer analysts. An equal-weighted S&P trades at an average 16.6 multiple of its next year’s earnings. That makes the average 10 multiple of banks seem less feeble.
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Bank profits will improve, argue the analysts, because the worst effects of the rate cycle are behind us. The Federal Reserve Bank may keep rates higher for somewhat longer than people hoped, but the direction from here will be down. That should improve the value of banks’ bond portfolios and end the outflow of deposits. Net interest income will rise.
As the economy powers ahead, loans should start to grow, says Oppenheimer. Mergers and acquisitions will revive.
When bank earnings expand, and investors realize they shouldn’t penalize the group by comparing it to the tech-heavy S&P, the Oppenheimer crew thinks their recommended banks will sport earnings multiples in the range of 12-to-13-times earnings.
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That will lift them by an average of 24.5%.
Write to Bill Alpert at william.alpert@barrons.com