Deep Dive: Big-bank earnings point to near-term pain and long-term opportunity
Now that earnings reports are in for the largest 10 U.S. banks, it’s apparent that investors expect some trouble from likely interest-rate cuts by the Federal Reserve, even if the overall industry trend remains positive.
All of this has helped push down the yield on 10-year U.S. Treasury notes TMUBMUSD10Y, +1.06% to 2.04% from 2.69% at the end of last year. Many banks’ net interest margins have begun to be squeezed as interest rates paid on deposits have increased and long-term rate indexes , have fallen. That said, the second-quarter figures still reflected favorable repricing for commercial loans at higher rates during 2018.
Here are consensus earnings-per-share estimates for 2019 and 2020 for the largest 10 U.S. banks, showing how they have been revised since March 31: Citigroup Citigroup C, -0.60% has the highest percentage of “buy” or equivalent ratings among the sell-side analysts and the lowest forward P/E ratio. Oppenheimer analyst Chris Kotowski is among the believers, with an “outperform” rating and $108 price target for the shares. Following Citi’s earnings announcement, Kotowski wrote in a note to clients: “We continue to think the shares are compelling at only 106% of TBV [tangible book value].
KBW analyst Sanjay Sakhrani rates Capital One “outperform” and in a note on July 18 wrote that “solid” results “should come as a relief given the relatively stronger NIM this quarter and general strength in credit metrics.” His price target for the shares is $106. Then again, bank’s core banking business is strong and it has the highest dividend yield, by far among the banks listed here — nearly 4%.
And this is where the opportunity lies. Sanders believes the order will be lifted in 2020. Yes, it is bad news if the order isn’t lifted this year, but we’re already in the third quarter and a lifting of the order in 2020 may boost the shares.
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