Citigroup, Goldman Sachs, Bank of America Poised to Gain From Fed Rate Cuts
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The Federal Reserve's interest-rate cuts might not be so bad for bank stocks after all.
And that could mean returns above 20% over the coming year for shareholders in Citigroup (C) - Get Report , Goldman Sachs (GS) - Get Report and Bank of America (BAC) - Get Report , according to a new report from the brokerage firm Keefe, Bruyette & Woods.
KBW, a small but well-respected firm specializing in financial-industry stocks, said this week in a report that rate cuts by the U.S. central bank -- expected to commence next week -- could help to "extend the economic cycle further despite the current cycle being the longest expansion in U.S. history."
The U.S. economy has now been growing for more than a decade, and Fed Chairman Jerome Powell has pledged to use all of the central bank's monetary-policy tools to keep it going, with an initial rate cut expected at a meeting on July 31.
Brian Kleinhanzl, KBW's lead analyst for large U.S. banks, upgraded his recommendation on Citigroup, Goldman and Bank of America to outperform from a neutral rating of market perform. He already had an outperform rating on JPMorgan Chase (JPM) - Get Report , the nation's largest lender.
While many investors and analysts had fretted about the likelihood that banks could face shrinking lending margins as a result of the rate cuts, Kleinhanzl wrote in the report that the Fed's move should allow banks to avoid the major surge in loan losses that would likely come from a steep economic downturn or a recession.
In the meantime, stocks of the largest U.S. banks are trading at a 59% valuation discount to the broader stock market, below the long-term average of 74%.
"The Fed trying to sustain growth in the economy is positive," Kleinhanzl wrote in the report. His forecast assumes that the Fed reduces the official U.S. borrowing rate by a total of 0.5 percentage point cuts this year, from the current range of 2.25% to 2.5%.
In an e-mail earlier this week, Kleinhanzl wrote that the likelihood of Fed rate cuts this year is probably already priced into bank stocks, in terms of the likely hit to lending margins, so the stocks could trade up as the economy stabilizes and perhaps even grows.
"If we move to a better macroenvironment after Fed-funds rate cuts, then that should be beneficial for loan growth, capital markets activity and credit, and each bank recommended has earnings levers to each of the drivers mentioned," Kleinhanzl wrote in the report.
Citigroup, Goldman Sachs and JPMorgan Chase are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells the stocks? Learn more now.
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