Banking, finance, and taxes

Banks Seeing Higher and Higher Analyst Target Prices Ahead of Earnings

Jon C. Ogg

Published: October 9, 2017 11:25 am

Last Updated: January 12, 2020 7:23 am

The week of October 9 to 13 will mark the start of the earnings reporting season covering the third quarter of 2017. Most investors seem to have few worries that hurricanes and slower economic data are going to upset the corporate earnings picture. After all, the stock market keeps hitting higher and higher all-time highs each week. Back in the old days it was universally true that for the stock market to be doing well it meant that the banks and the financial sector had to be doing well. That makes sense on the surface — how great can the market be if those with the largest control of the markets aren’t doing well?

It turns out that many banks and financial firms have seen their price targets and expectations raised by analysts ahead of this earnings season. This is a classic play that older investors have seen many times, and what it means is that the banks and financials likely will have to post solid earnings. If not, their shares may have to give back some of those fresh gains.

What makes these target hikes even more demanding for the bank stocks is that many of the ratings are either reiterated Buy and Outperform ratings for the third or fourth time, and some of the ratings are also just at Neutral. There were even some analyst downgrades, despite price targets being hiked.

24/7 Wall St. has covered several of the key analyst calls made ahead of earnings. Some are robust target price hikes, and others seem more like maintenance calls ahead of time, so the analysts do not look like they are playing Monday morning quarterbacks.

Consensus analyst target data are from Thomson Reuters. Other color has been provided on each bank as well.

Bank of America Corp. (NYSE: BAC) was reiterated as Outperform and the price target was raised to $31 from $28 at Credit Suisse. That would generate 19% in total upside if the firm is correct on the price target and with the dividend included. Citigroup maintained its Neutral rating but raised its price target to $27 from $25. Bank of America’s consensus analyst target at Thomson Reuters is now $27.40, but that was $26.96 a month ago and $26.25 in July ahead of earnings. Its shares are up almost 19% so far in 2017.

Citigroup Inc. (NYSE: C) was maintained as Outperform at Credit Suisse, but the firm raised its target price to $83 from $73. That represents about 12% upside, if you include the dividend. Citigroup shares closed at $75.64 ahead of this call, in a 52-week trading range of $47.54 to $76.02 and with a consensus analyst target price of $74.27. The consensus analyst target price was $62.54 a month ago, and it was $66.24 back before the earnings release in July. Citigroup is up over 27% so far in 2017.

E*Trade Financial Corp. (NASDAQ: ETFC) was raised to Buy from Neutral and its price objective was raised to $49 from $44 (versus a $43.95 prior close) at Merrill Lynch. E*Trade shares were down over 2.3% on Friday but were last seen up 1.1% at $44.47 on Monday morning. The firm sees additional upside coming from more deposits onto the balance sheet, core growth, higher reinvestment rates, more margin upside, a decrease in E*Trade’s leverage ratio, the reinstatement of share repurchases and potentially lower tax rates. Just last week there were price target hikes from Deutsche Bank (to $49 from $47), Instinet (to $52 from $47) and Jefferies (to $46 from $43). The current consensus target price of $47.13 is up from $45.33 a month ago, and that target was all the way down at $41.23 in mid-July. The shares are up over 27% so far in 2017.

Goldman Sachs Group Inc. (NYSE: GS) was downgraded to Neutral from Outperform but the price target was raised to $255 from $240 at Credit Suisse, with the downgrade being based on valuation rather than fundamentals. Citigroup maintained its Neutral rating on Goldman Sachs, but it raised its target price to $250 from $225. Merrill Lynch has a Buy rating, but it raised its price objective to $275 from $260. Goldman Sachs has a 52-week range of $165.51 to $255.15 and a consensus target price of $239.76. Despite the target hikes and strength of the Dow and S&P 500, Goldman Sachs shares were last seen up less than 3% year to date, despite better performance of the last quarter and month.

JPMorgan Chase & Co. (NYSE: JPM) was reiterated as Outperform but the price target was raised to $110 from $103 at Credit Suisse. That is a call for 15% upside, with its dividend yield included. The consensus target price is $96.35, up from $95.12 a month ago and $94.40 in July, before the second-quarter earnings came out. JPMorgan’s stock is up over 12% so far in 2017.

Morgan Stanley (NYSE: MS) was raised to Outperform from Neutral and the price target was raised to $54 from $49 (versus a $49.76 close) at Credit Suisse. Citigroup also raised its target price to $50 from $46, but it maintained its Neutral rating. Morgan Stanley has a 52-week range of $30.96 to $50.14 and a consensus price target of $50.21. Its stock has a year-to-date return of almost 18%.

PNC Financial Services Group Inc. (NYSE: PNC) was more or less an at-the-money call from two banks. Citigroup has a Neutral rating but raised the price target to $135 from $126, and Credit Suisse raised its target to $135 from $126. Effectively that implies that PNC shareholders might only have the dividend to look for right now, rather than growth in the stock price. The consensus price target of $134.40 is up from $132.48 a month ago and $128.92 before its earnings report in July. The shares are up about 16% so far in 2017.

SunTrust Banks Inc. (NYSE: STI) was raised to Neutral from Underperform at Credit Suisse, but the firm raised its target price to $60 from $56. Citi raised its SunTrust target price to $63 from $60, despite having only a Neutral rating. The consensus analyst target of $62.86 is less than 1% higher than the $62.31 target a month ago and is about 2% higher than the $61.52 consensus analyst target price back in July. SunTrust shares are up almost 11% so far in 2017.

U.S. Bancorp (NYSE: USB) was maintained as Neutral at Citigroup, but its target was raised to $58 from $53 (versus a $54.18 close). Credit Suisse has a Neutral rating but raised its target to $53 from $50 on Monday. The 52-week range is $42.37 to $56.61, and the consensus target price was $54.66. The current consensus target of $54.78 is little changed from the $54.75 just 30-days ago and the $54.50 target back in mid-July. U.S. Bancorp’s shares have returned only about 5.5% so far in 2017.

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Credit Suisse’s industrywide take on banks right now is that not much has changed from its own mid-quarter updates. That is that the bank’s fundamentals look just fine with slower loan growth, weak trading revenues and credit quality normalization baked into expectations. The firm’s take is that these expectations translate into a 5% year-over-year earnings per share growth, which Credit Suisse calls solid without much tailwind. Still, it sees 10% and more total return (stock upside and dividends combined) in its top-rated names.

JPMorgan has previewed the bank trends as being tepid. It sees very weak loan growth and a modest increase in net interest margin, and it expects weak trading revenues and weak investment banking revenues.

Keefe Bruyette & Woods has said that the rally in bank stocks should last a while longer. The firm noted that the global central banks talking more toward tighter monetary policy and supporting higher bond yields should be supportive for the banks when you add in moves toward lower bank regulation and with their valuations versus the S&P 500 being below the post-crisis average.

The reality is that most of the analyst calls, even when cautious on valuations, are looking for some additional upside in the banks. Many of these stocks have already seen stellar performance, which means they probably are going to have to keep delivering good news if they want to keep shareholders happy. Longer-term investors are quite used to seeing investors sell off bank stocks initially after good earnings reports. That being said, those sell-offs in recent years have proven to be good buying opportunities.