Financial stocks haven’t fared well this year, with the KBW Bank stock Index dropping 15.5% year to date. That compares to a 14.3% fall for the S&P 500.
But the weakness in financial stocks may provide some buying opportunities.
“The macroeconomic backdrop for stocks in the financial sector has been challenging year-to-date,” Wells Fargo analysts, led by Mike Mayo, wrote in a commentary.
That backdrop is “driven by significant volatility in equity markets and interest rates, [downward]-revised GDP forecasts, … supply chain issues, elevated gas prices, and” uncertainty overseas created by the war in Ukraine, they said.
But they offered five stocks across financial sectors that have become “more compelling given recent movements.”
Large-Cap Banks: Bank of America
“Bank of America (BAC) - Get Bank of America Corporation Report is our No. 1 pick among large-cap banks,” the analysts wrote. “We estimate a 40% upside [for the stock], assuming a one-third chance of recession.”
“What's underappreciated is the degree of BofA’s net interest income growth (NII),” an estimated 50% over the next three years, the analysts said.
“BAC reflects our theme of ‘NII to the Sky’ more than any other large bank,” the analysts said. “And this theme further gets helped by accelerating loan growth [during the second quarter] in a period of higher rates.”
Mid-Cap Banks: Signature Bank
“Signature Bank (SBNY) - Get Signature Bank Report remains our top pick among mid-cap banks, as its growth, asset sensitivity and credit quality continue to be discounted by the Street during this period of uncertainty,” the analysts said.
“We expect the benefits from its multi-faceted business model will continue to prove out, making the current price-earnings ratio of 7.3 times 2023 earnings estimates and the price-to-book value of 179% an attractive buying opportunity.”
Insurance: Arch Capital
“On the P&C side, a hallmark of the company since its foundation has been its ability to opportunistically go in and out of markets depending on the most attractive current opportunities.”
As for mortgage insurance, “credit remains strong and supports good profitability of the business,” the analysts said.
Specialty Finance: American Express
“Our top pick American Express (AXP) - Get American Express Company Report is oversold around recession and wealth effect fears,” the analysts said. “The shares are trading at 14 times our 2023 earnings estimate. [That’s] well below the 18 times we believe is warranted for this high return on equity business.”
Further, “we believe AXP continues to build their moat around the affluent card member,” the analysts said. That brings “a set of difficult-to-replicate advantages such as premier service, hotel/airline partners and airport lounges.”
Asset Managers: Apollo Global Management
Apollo (APO) - Get Apollo Global Management Inc. (New) Report is the analysts’ favorite pick, remaining heavily discounted to other alternative asset managers at 9 times consensus earnings for 2023, the analysts said. “This likely reflects APO's insurance-heavy (roughly half) earnings profile, which we see as creating a good position” amid rising interest rates.
“We see some observers’ concerns about the success of APO’s private equity fundraising this year as overblown, especially in light of the popularity of APO’s value-oriented style in the current environment,” the analysts said.