Jefferies Says Banks Still Have Room to Run: 4 Top Picks to Buy Now

[cnxvideo id=”509258″ placement=”ros”]One industry that exploded out of the gate after the Donald Trump victory was the banks stocks, especially the big boys. The question on the minds of many investors is a simple one: have the banks run too far, too fast? Given their 18% run since the election, one might think so. But with the positives still very much in place, the banking team at Jefferies feels that the ultimate bull case could be 30% to 35% increase in earnings from here, with a 1% increase in interest rates over the next two years and a 15% overall tax cut.

While the Jefferies model also includes a moderate growth in loans and fees, the team is now focusing on some the large regional banks, as the runs in the large cap money center banks and Wall Street leaders have been staggering. We focused in on the analysts’ top picks, and found four stocks that look outstanding now. All are rated Buy at Jefferies.

Bank of America

This bank posted very solid third-quarter results, and the overall trend for the company looks better. Bank of America Corp. (NYSE: BAC) is a ubiquitous presence in the United States, providing various banking and financial products and services for individual consumers, small and middle market businesses, institutional investors, corporations and governments in the United States and internationally. It operates 5,100 banking centers, 16,300 ATMs, call centers, online and mobile banking platform.

The company is one of the larger lenders to the oil and gas industry, and it told analysts earlier this year that it had set aside more money for coverage of loans to the industry that may go bad. Overall credit quality remained strong, while consumer portfolios continued to improve and commercial portfolios remained stable with energy improving. The equity and debt trading at the firm helped boost the third-quarter results, while low interest rates still remain a drag, but are looking exceedingly brighter.

Bank of America investors are paid a small 1.35% dividend. The Jefferies price target for the stock is $24, and the Wall Street consensus price target is posted at $20.05. The stock closed on Tuesday at $22.15 per share.

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KeyCorp

This is a smaller large cap bank that makes good sense now, and it made its debut on the Jefferies Franchise Picks list earlier this fall. KeyCorp (NYSE: KEY) operates as the bank holding company for KeyBank National Association, which provides deposit, lending, cash management and investment services to individuals, small and medium-sized businesses.

The company also provides a broad range of sophisticated corporate and investment banking products, such as merger and acquisition advice, public and private debt and equity, syndications and derivatives to middle market companies in selected industries throughout the United States under the KeyBanc Capital Markets banner.

Jefferies likes the larger regional banks, noting that valuations look very reasonable and cost saving plans are helping to make forward estimates look very achievable. With overall credit remaining solid, earnings and loan, deposit and fee growth all are positive metrics for the bank.

KeyCorp investors are paid a nice 1.89% dividend. Jefferies has a $20 price target for the stock, and the consensus price objective is $17.33. Note that she shares closed above that on Tuesday at $17.95.

U.S. Bancorp

This is another top super-regional bank that the Jefferies team favors for 2017, and they recently raised their rating to Buy. U.S. Bancorp (NYSE: USB), with $422 billion in total assets, is the parent company of U.S. Bank, the fifth largest commercial bank in the United States, as well as fourth largest by number of branches. Founded in 1929, and headquartered in Minneapolis, USB offers a comprehensive line of banking, investment, brokerage, trust and mortgage services to consumers, businesses and institutions.

Many on Wall Street like the fact that USB has no meaningful capital markets exposure and has among the best risk management/credit profile in the industry, and it generates among the highest returns of peers. These are both cited by the Jefferies team as a reason to own the stock.

Fee income represents a whopping 45% of total revenue, spread over four separate business silos, providing a strong overall base. The diversity of business lines/revenue streams is expected to drive strong through-the-cycle performance, and the analysts expect overall loan growth in the range of 4% to 6% year over year.

US Bancorp investors are paid a very solid 2.21% dividend. The $57 Jefferies price target is well above the consensus price objective, which is $49.30. Shares closed most recently at $50.73.

Zions Bancorp

This is another top regional bank that the Jefferies team likes now, and it is a top play in the western United States. Zions Bancorporation (NASDAQ: ZION) offers community banking services, such as small and medium-sized business and corporate banking; commercial and residential development, construction and term lending; retail banking; treasury cash management and related products and services; and residential mortgage servicing and lending.

The company also provides trust and wealth management services; capital markets services, including municipal finance advisory and underwriting; and investment services. And it offers personal banking services to individuals, including home mortgages, bank cards, other installment loans, home equity lines of credit, checking accounts, savings accounts, certificates of deposit of various types and maturities, safe deposit facilities, direct deposits and Internet and mobile banking services.

Further, Zions provides online and traditional brokerage services; small business administration and secondary market agricultural real estate mortgage loans; and bond transfer, stock transfer, and escrow services for corporate customers. As of December 31, 2015, the company operated 450 domestic branches.

Shareholders are paid a small 0.76% dividend. Jefferies has its price objective set at $45, while the consensus target price is much lower at $38.20. The shares closed most recently at $41.92.

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Just like the large cap money center giants, these stocks have also run smartly. Investors may want to buy partial positions now and see if we don’t get a slight pull back early next year.