Matt O'Connor of Deutsche Bank offered investors three names within the U.S. banking space to invest in following the recent pullback in bank stocks.
O'Connor noted that bank stocks are down 13 percent since their highs in late July and have underperformed the 9 percent decline in the S&P 500 index. The analyst added that the selloff was attributed to global growth concerns and "mixed emotions" over a September Fed tightening.
The Banking Sector
"Stocks are no longer pricing in material rate increases (we believe just one to two increases by the end of 2016 are being priced in)," O'Connor wrote in his note. "This makes asset sensitive banks somewhat tempting. However, they haven't sold off any more than high quality large regionals have. Given this, we prefer moving up the quality spectrum."
Related Link: Ken Langone: "Banks Were Made The Scapegoats...Beaten Up Mercilessly, Unfairly"
A Few Upgrades
With that said, the analyst upgraded shares of PNC Financial Services Group Inc (NYSE: PNC), U.S. Bancorp (NYSE: USB) and Wells Fargo & Co (NYSE: WFC) to Buy from Hold with no assigned price targets.
Different Categories Of Banks Require Different Treatment
O'Connor explained that "it makes sense" to become "more aggressive" on higher quality banks (i.e., the three stocks he upgraded) given the lack of differentiation, the increase in market (and economic) volatility/uncertainty. In addition, these banks may prove to be "better positioned" to succeed in a higher rate environment than is perceived given "large sticky core deposit bases."
O'Connor expanded, noting that PNC Financial Services could benefit from a cost savings program (highlighted during the second quarter conference call), flexibility to deploy liquidity/add securities, very good credit and risk management, and minimal exposure to capital markets related areas.
Moving on to U.S. Bancorp, O'Connor argued that the stock has fallen over concerns of slowing revenue and higher expenses. However, the company has "no meaningful" exposure to the capital markets and has one of the best risk management and credit profiles in the industry. In addition, the company generates the highest returns of peers (second-quarter ROTCE of 19 percent versus the Super Regional group's average of 12 percent).
Finally, Wells Fargo could also benefit from additional cost saving initiatives, while excess liquidity provides flexibility to allow the company to take advantage of higher rates. In addition, its exposure to capital markets is "less than market sensitive" banks and brokers.
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Latest Ratings for PNC
Date | Firm | Action | From | To |
---|
Sep 2015 | Deutsche Bank | Upgrades | Hold | Buy |
Sep 2015 | Keefe Bruyette & Woods | Upgrades | Underperform | Market Perform |
Aug 2015 | Keefe Bruyette & Woods | Downgrades | Market Perform | Underperform |
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