Credit Suisse is selectively bullish on large-cap bank stocks.
Large-cap bank stocks have been strong performers so far in 2021, but analysts say a handful of them have additional upside potential. Investors can buy into this potential ahead of the banks' third-quarter earnings, which start rolling out Oct. 13 and could spur market interest. A Credit Suisse analyst team led by Susan Roth Katzke has named its seven top large-cap bank stocks in an environment of elevated inflation, economic growth and rising interest rates. While the current backdrop is favorable for most bank stocks, Credit Suisse prefers banks that are positioned to gain profitable market share during the economic recovery. Here are Credit Suisse's top seven large-cap bank stocks to buy now.
JPMorgan Chase & Co. (ticker: JPM)
Katzke says JPMorgan Chase is leveraging its large-scale and highly integrated product portfolio to drive profitable and sustainable revenue growth, demonstrating the inherent value in the universal banking model. She says the bank's operating leverage and capital efficiency are particularly impressive, and she predicts that the stock will generate outsize returns throughout the current banking cycle. JPMorgan is an offensive bet on market-share gains in a bullish banking environment, but Katzke says its diversification and reliable track record also provide peace of mind for investors. Credit Suisse has an "outperform" rating and $177 price target for JPM stock, which closed at $168.66 on Oct. 5.
Bank of America Corp. (BAC)
Katzke says Bank of America is generating impressive organic revenue growth and demonstrating sustainable operating leverage. At the same time, the company is maintaining manageable credit risk and its capital efficiency is unlocking value for shareholders. Katzke says Bank of America's execution has been consistent, and its return on tangible equity, or ROTE, is its biggest potential catalyst. She says stable earnings and effective capital management could generate earnings multiple expansion for the stock, which currently trades at about 12 times forward earnings estimates. Credit Suisse has an "outperform" rating and $47 price target for BAC stock, which closed at $44.22 on Oct. 5.
Citigroup Inc. (C)
Earlier this year, Jane Fraser became the first female CEO of Citigroup. Katzke says the management transition is good news for investors, though the stock's 20% year-to-date gain is among the lowest on this list. Katzke is awaiting updates from the new management team on strategic positioning and its plans to boost ROTE to the mid-teens percentage range. For now, Citigroup's 10% ROTE lags behind its big bank peers, but Katzke says the stock's valuation discount is much steeper than it deserves. Credit Suisse has an "outperform" rating and $82 price target for C stock, which closed at $72.53 on Oct. 5.
Goldman Sachs Group Inc. (GS)
In the near term, Katzke says, additional upside for Goldman Sachs shares depends mostly on earnings power. In the longer term, she says, sustainable ROTE will be key to Goldman's continued success. Each quarter that Goldman delivers earnings and revenue numbers at or above expectations, the bank's three-year plan becomes increasingly achievable, especially in a normalized banking environment, according to Katzke. She says additional improvements to Goldman's capital ratios in its annual stress-test results could be a bullish catalyst. Credit Suisse has an "outperform" rating and $450 price target for GS stock, which closed at $385.81 on Oct. 5.
Morgan Stanley (MS)
Katzke says investment bank Morgan Stanley has impressive operating leverage and secular revenue growth opportunities. In addition, she says the integration of acquisitions such as Solium Capital, Eaton Vance and E-Trade will help Morgan Stanley improve its capital efficiency and work toward its long-term goal of 17% ROTE. Bullish catalysts include market-share gains, asset inflows and improvements in capital efficiency metrics, which Katzke says could unlock value for investors. Morgan Stanley's stock trades at about 13 times forward earnings, suggesting downside valuation support. Credit Suisse has an "outperform" rating and $108 price target for MS stock, which closed at $99.20 on Oct. 5.
Wells Fargo & Co. (WFC)
Wells Fargo has lagged behind big bank peers for the past several years after a series of scandals that ultimately resulted in a punitive Federal Reserve asset cap on the bank. However, Wells Fargo has been the top performer among the seven banks mentioned so far in 2021, and it is Katzke's top overall stock pick among large-cap banks. She says Wells Fargo has the most sensitivity to rising interest rates, and the eventual lifting of the Fed asset cap could be a key catalyst for the stock. Credit Suisse has an "outperform" rating and $55 price target for WFC stock, which closed at $47.96 on Oct. 5.
Bank of New York Mellon Corp. (BK)
Katzke says asset servicer Bank of New York Mellon is positioned for modest organic revenue growth and has opportunities to improve its pretax margins. Those factors could help the bank maintain roughly 20% ROTE over time. Bank of New York Mellon shares trade at just 12 times forward earnings, but Katzke says the stock's valuation does not fully reflect the bank's impressive capital levels and returns. Looking ahead, she says potential bullish catalysts include excess capital deployment, further efficiency improvements and expansion into new markets. Credit Suisse has an "outperform" rating and $56 price target for BK stock, which closed at $54.42 on Oct. 5.
Bank stocks with upside before earnings:
-- JPMorgan Chase & Co. (JPM)
-- Bank of America Corp. (BAC)
-- Citigroup Inc. (C)
-- Goldman Sachs Group Inc. (GS)
-- Morgan Stanley (MS)
-- Wells Fargo & Co. (WFC)
-- Bank of New York Mellon Corp. (BK)