Why a September Rate Hike Could Power 4 Bank Stocks Higher

[cnxvideo id=”625490″ placement=”ros”]Not many sectors are positive on rate hikes, but one that is has been on a solid run since the end of June, and it may be ready to really break out. Bank stocks are up a stunning 18% over the past two months, and with Fed Chair Janet Yellen’s comments last week leaving the door open for 2016 rate hikes, a strong jobs number this week could lead to a September increase.

A recent Merrill Lynch research report notes that the market implied probability has jumped from fears of a rate cut to a 42% and 63% chance of a rate hike for September and December, respectively. While, generally speaking, central bankers are loath to raise rates during an election cycle, the data may force their hand.

Merrill Lynch highlights two stocks in its report that could benefit, and we screened for two additional money center banks that make sense as well. All are rated Buy.

Citigroup

This top bank stock is still down over 15% from highs that were posted last summer, and the company also posted very solid second-quarter results. Citigroup Inc. (NYSE: C) has approximately 200 million customer accounts and does business in more than 160 countries and jurisdictions. It provides consumers, corporations, governments and institutions with a broad range of financial products and services, including consumer banking and credit, corporate and investment banking, securities brokerage, transaction services and wealth management.

Trading at a very cheap 9.4 times estimated 2016 earnings, this stock looks very reasonable in what is becoming a pricey stock market. A continuing stock buyback program at the bank is a positive. The company’s institutional clients group appeared to be holding its ground last quarter. While investment banking revenue was down in an unsure macro environment, trading revenue remained strong, up 2% from last year.

Citigroup investors are paid a 1.35% dividend. The Merrill Lynch price target for the stock is $50, and the Wall Street consensus price objective is $54.19. Shares closed most recently at $47.26.

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East West Bancorp

This smaller bank company is highlighted in the Merrill Lynch report, and it could benefit from a positive jobs number. East West Bancorp Inc. (NASDAQ: EWBC) offers various deposit products, comprising personal and business checking and savings accounts, time deposits and individual retirement accounts, travelers checks, safe deposit boxes, and MasterCard and Visa merchant deposit services.

Its lending portfolio consists of residential single-family and multifamily loans; commercial real estate loans and construction and land loans; trade finance loans; commercial business loans, including accounts receivable, small business administration, inventory and working capital loans; and consumer loans, such as home equity lines of credit, auto loans and insurance premium financing loans.

The bank is focused exclusively on the United States and Greater China markets and operates over 120 locations worldwide, including California, New York, Georgia, Massachusetts, Texas and Washington, as well as full-service branches in Hong Kong and Shanghai and representative offices in Beijing, Shenzhen and Taipei.

Investors receive a 2.21% dividend. Merrill Lynch has a $42 price objective, and the consensus target is lower at $40.75. The stock closed Monday at $36.20.
JPMorgan

This stock trades at a very low 10.8 times estimated 2017 forward earnings and could respond well in a rising rate scenario. JPMorgan Chase & Co. (NYSE: JPM) is expected to continue to benefit from commercial loan growth and an upturn in capital spending. Wall Street analysts agree that the stock seems attractively valued on estimated price-to-earnings and a very solid price-to-book value. Some on Wall Street have cautioned that last year’s divestiture of the physical commodities business could provide earnings headwind throughout this year.

Improvement in loan growth, terrific equity capital markets and a steady increase in deposits will be a solid plus. Trading at a discount to many of the large cap banks on 2016 earnings estimates helps upside potential as well. With $2.6 trillion in assets on a worldwide basis, and one of Wall Street’s savviest leaders in Jamie Dimon, the stock is a solid buy for investors.

Earlier this year, Dimon put his money where his mouth was and reportedly bought a stunning 500,000 shares of the stock for a massive $26 million. That brought his total holdings in the bank to 6.7 million shares, worth over $360 million.

JPMorgan investors receive a solid 2.87% dividend. The $70 Merrill Lynch price target compares with the consensus price target of $69.84. The shares closed Monday at $66.95.

PNC Financial Services

This top regional bank was down almost 20% in the first six weeks of 2016 but has rebounded smartly. PNC Financial Services Group Inc. (NYSE: PNC) is one of the country’s largest diversified financial services organizations. It provides retail and business banking; residential mortgage banking; specialized services for corporations and government entities, including corporate banking, real estate finance and asset-based lending; and wealth management and asset management. With consistent earnings growth and a very positive and growing loan portfolio, the company is a premiere super-regional bank stock to own.

Wall Street analysts point to numerous positives, including the bank implementing huge cost savings plans. The bank is working on up to $100 million of new savings announced last year, and it is also applauded for outstanding credit/risk management and the limited exposure to the capital markets related areas, while focusing on traditional banking.

Top analysts also cite the bank’s impressive Basel III common equity tier 1 ratio of 10.0% for the fourth quarter of 2015, which well exceeds the 8.5% level that they feel PNC needs to run a conservative but very profitable bank. Merrill Lynch sees the bank as a top large cap pick that could also benefit from a strong jobs report.

PNC shareholders receive a very solid 2.4% dividend. The Merrill Lynch price target is set at $90, while the consensus target is $92.78. Shares closed Monday at $87.87.

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While the move up in the bank stocks has been solid during the summer months, strong job growth and a rising rate environment could really help push shares higher in the fall. Investors may want to buy partial positions in front of Friday’s jobs report.