Big banks are still a strong investment ripe for further growth, Barclays analysts said in a note Jan. 2.
Barclays is raising its 2018 earnings estimates and price targets for its entire coverage in the large cap banking sector, plus introducing 2019 estimates that suggest continued growth.
"The biggest driver of the 2018 EPS increase is a reduction in the corporate tax rate, in addition to continued federal funds rate hikes," analysts wrote. "Still, our estimates reflect double-digits EPS growth at the median bank prior to tax reform and over 25% growth with it."
For the median bank in Barclays' coverage, potential upside is nearly 20% and dividend yield could reach more than 2%. An economic backdrop including growing GDP, improving unemployment rates and rising short-term interest rates will stoke earnings growth in the sector, Barclays said. Additionally, improved loan growth, net interest margin expansion, higher capital markets revenues, positive operating leverage and active capital deployment will contribute to sector success this year.
All this comes alongside an improving regulatory backdrop, Barclays noted, which should benefit revenues, expenses and capital return.
"From a macro view, we believe this sector will outperform in 2018 due to the higher interest rate environment and economic expansion from tax cuts," said TheStreet's Action Alerts Plus research team.
Barclays noted that there are still risks and uncertainties in large cap banks. The country is in the later stages of the most recent economic boom, and since banks are often a bellwether of economic performance, they could get hit first in the event of a downturn. The many moving parts of tax reform could also hit banks, though the legislation is largely positive for the sector. Technology could also shake banks, as competition "remains intense, increasing the importance of economies of scale," analysts said.
"In 2017, the Money Centers outperformed the Trust Banks and Super Regionals for the 2nd straight year, a trend we expect to continue," Barclays wrote. In the sub-sector, Citigroup (C - Get Report) and JPMorgan Chase & Co. (JPM - Get Report) stand out, while Goldman Sachs (GS - Get Report) could "play some catch-up near-term given it has significantly lagged its peers lately."
As for Trust Banks, Barclays said State Street Corp. (STT - Get Report) and Bank of New York Mellon Corp. (BK - Get Report) are stronger picks than Northern Trust Corp. (NTRS - Get Report) . And in Super Regionals, "traditional high-performers" M&T Bank Corp. (MTB - Get Report) , US Bancorp (USB - Get Report) and Wells Fargo & Co. (WFC - Get Report) could "regain some of their lost luster."
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