As the path of economic recovery increasingly looks clearer, analysts are finding buying opportunity in banking shares across the globe. Lenders are expected to benefit with the reopening of the economy as vaccination drive picks up pace in various countries. Global activity is expected to have risen back to pre-covid levels in the fourth quarter of this year and economic growth is forecasted to return to normal in the next few quarters. “We see long end rates rising, loan growth holding up, and banks deploying excess capital and excess reserves accreted through the crisis,” said analysts at global brokerage and research firm Morgan Stanley.
Banks set to fire on all cylinders
The brokerage firm recently upgraded US large cap bank stocks and the consumer finance sector to ‘Attractive’ believing banks are set to fire on all cylinders. “Vaccine distribution enabling US normalization by the end of 2021 is bullish for our coverage. It provides a high degree of certainty that this recession will end in 2021, driving up long-end interest rates, accelerating loan growth, driving down unemployment and allowing banks to resume buybacks,” the report said.
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Aiding their preference for banks is the expectation that by 2022 long-end rates would rise from current levels across most markets. Inflation-adjusted loan growth in most markets is also expected to be relatively steady when compared to the previous two years.
Digital payments pick up
In 2020, social distancing has helped increase the adoption of digital payments. “Historically, card penetration of consumer spend in the US increases ~2 percentage points per year. The pandemic, and the rapid adoption of contactless payments and eCommerce, has caused a step-function increase in the share of spend captured on cards. Going forward, we expect the annual share gain of card to return to its ~2 percentage point cadence off a higher CY20 base,” analysts at Morgan Stanley said.
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For US large-cap banks, the growth drivers include higher loan growth, expected to be at 4.8% by 2022. Morgan Stanley also expects banks to optimise their capital structure as the economic recovery picks up, which is further expected to aid more buybacks.
Morgan Stanley’s top banking stock picks
The uncertainty around the impact on business exits is accounted for in the stock at 6.6x Morgan Stanley’s 2022e EPS and 0.7x 3Q20 BV. “Asset sensitivity and expense optimization the main drivers of forward EPS outlook,” they added. The target price for the stock is $40.
Citigroup has been termed as a deep value play in an improving economy. “At just 0.6x NTM BVPS, C is cheap even after factoring in higher expenses from the consent orders. Stock does not reflect Citi’s diverse business mix and more resilient wholesale business,” the report said. The target price for the stock is $79.
“RF winning the battle against the curve, as hedges add ~30bps to NIM and ~2% pts to ROE. RF undervalued for this level of earnings stability in their business model over the next ~4 years,” Morgan Stanley said. Target price for the stock is $22.