For the banks in 2020, facing continued pressure on revenue as interest rates stay low, one differentiator will be key to growing the top lines and share prices.
The Invesco S&P 500 Equal Weight Financials ETF (RYF) - Get Report is up almost 25% in the past year, largely keeping pace with the S&P 500's gain, with some of the largest U.S. banks beating the index.
Bank stocks benefited from lower rates, implemented by the Federal Reserve, which make individual loans less profitable but spurred loan volumes. Meanwhile, banks saw a modest uptick in valuation, having entered 2019 with historically low price-to-book-value multiples.
Now, analysts are expecting many banks to see revenue and earnings either contract a bit or grow anemically, as continued low rates pressure their net interest income. (That's the difference between the revenue a bank takes in on its assets and the costs of paying out interest on deposits.)
Citigroup (C) - Get Report is expected to see revenue growth of 1%, according to analysts polled by FactSet. Wells Fargo (WFC) - Get Report is expected to see both revenue and earnings decline. JPMorgan Chase (JPM) - Get Report is expected to see revenue grow less than 1% and EPS grow less than 2%.
Many analysts are now saying precise cost management will the most important factor in determining which banks will see strong profit growth in the coming year.
"Who will outperform? [The] banks best positioned to deliver positive operating leverage will benefit the most," wrote Morgan Stanley analyst Betsy Graseck in a note. On Monday, Goldman Sachs analyst Richard Ramsden tabbed operating leverage as the key driving Citigroup's stock higher.
Ramsden raised his price target on Citi to $88 from $84, saying the bank can achieve its 2020 return-on-equity goal of 12.4% by leveraging its operating expenses more efficiently.
Citi's 2019 RoE -- net income as a percentage of book value -- will come out to roughly 11.5%, FactSet's survey shows. Ramsden pegs Citi's forward-earnings multiple at 9.4 times, a discount to peers, and expanding to 10.
Graseck echoes the point: "We like Citi going into the fourth quarter on a better outlook for 2020 expenses."
She called Citi a "self-help story," as it is less sensitive to interest rates than other banks, a view Ramsden also takes.
Graseck is optimistic that new consumer division CEO Jane Fraser, "viewed as an excellent operator," can drive down operating expenses for the unit.
This, combined with Citi's relatively low price-to-book multiple of around 0.9, justifies a $90 price target, Graseck says. She even has a target multiple of 10 based on 2021 EPS.
Her price target reflects 14% upside from the stock's current level.
Graseck also says PNC (PNC) - Get Report is poised to drive operating leverage and grow EPS. She also likes American Express, AXP which she calls undervalued, trading at 12.4 times 2021 expected earnings per share.