The perfect storm that prevailed for most of the past year that put the top financial stocks (including banks and brokerage firms) in a very out-of-favor consensus seems to be passing. Despite solid earnings and asset growth, Wall Street looked the other way. Some positive changes for the top companies look to be on the horizon, and the analysts that cover the sector at Goldman Sachs are very positive on four leading companies as we start 2021.
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In a new research report, Goldman Sachs notes that optimism around more and continued stimulus, infrastructure spending and the combination of higher interest rates, larger capital returns and lower credit losses in the second half of 2021 could spark the top stocks higher. The firm noted this when discussing the sector:

In our view, the biggest variables which will drive share price performance in the medium term are sustainability of capital markets revenue, loan growth, and the structure of the rates curve. We also believe longer term efficiency gains may be realized, given that banks have significantly increased the pace of investment into digital technologies over the past few years, and this should result in lower cost structures over time.

For conservative growth and income investors, the four stocks that the firm has rated Buy make good sense and still offer very solid entry points. It remains important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.

Bank of America

The company is expected to post solid fourth-quarter results, and its stock is on the Goldman Sachs Americas Conviction list. 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 and online and mobile banking platforms.

The analysts noted this when discussing the money center giant:

We expect the bank to generate best in class return on average tangible common shareholders’ equity by 2022 estimated, driven by scale and conservative underwriting, as well as notable excess capital return potential. In the short term, conservative underwriting should result in among the most earnings upside from releasing reserves across the large banks. Bank of America has expanded into a number of new US markets, with scale across the US positioning them ideally to benefit from accelerating loan growth over the next two years. Moreover, unlike smaller peers, scale allows the bank to substantially increase investment over the next few years without notably jeopardizing returns, driving further market share gains.

Shareholders receive a 2.19% dividend. The Goldman Sachs price target for the shares is $33, while the Wall Street consensus target is $31.92. Bank of America stock closed on Thursday at $32.86 a share.

Citigroup

This top bank has rallied well off the 2020 lows and looks poised to move higher in 2021. Citigroup Inc. (NYSE: C) is a leading global diversified financial service company that provides consumers, corporations, governments a broad range of financial products and services.

Citigroup offers services such as consumer banking and credit, corporate and investment banking, securities brokerage, transaction services and wealth management. It operates and does business in more than 160 countries and jurisdictions.

Trading at a still very cheap 9.9 times estimated 2021 earnings, this stock looks very reasonable in what remains a volatile stock market and in a sector that has lagged dramatically.

Citigroup stock investors receive a 3.09% dividend. Goldman Sachs has a price target of $67, and the posted consensus price objective is $65.72. The shares closed most recently at $66.02 apiece.
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JPMorgan

This industry leader trades at a still reasonable 14.5 times estimated 2021 earnings. JPMorgan Chase & Co. (NYSE: JPM) is one of the leading global financial services firms and one of the largest banking institutions in the United States, with about $2.6 trillion in assets. The company as it is today was formed through the merger of retail bank Chase Manhattan and investment bank J.P. Morgan.

The firm has many operating divisions, including investment and corporate banking, asset management, retail financial services, commercial banking, credit cards and financial transaction services.

The analyst voiced similar thoughts on JPMorgan as on Bank of America:

We expect the bank to generate best in class return on average tangible common shareholders’ equity by 2022 estimated, driven by scale and conservative underwriting, as well as notable excess capital return potential. In the short term, conservative underwriting should result in among the most earnings upside from releasing reserves across the large banks. JP Morgan has expanded into a number of new US markets, with scale across the US positioning them ideally to benefit from accelerating loan growth over the next two years. Moreover, unlike smaller peers, scale allows the bank to substantially increase investment over the next few years without notably jeopardizing returns, driving further market share gains.

Investors receive a 2.64% dividend. The $139 Goldman Sachs price objective is well above the $122.21 consensus price target. JPMorgan stock closed Thursday at $135.87, after more than a 3% gain on the day.

Morgan Stanley

This is one of Wall Street’s white-glove firms, and it may be among the best buys in the banking and investment arena. Morgan Stanley (NYSE: MS) is a global investment bank with leading positions in investment banking (M&A and equity underwriting), equity trading and wealth management, which contributes nearly 50% of firmwide revenues. The firm also has an asset management business, which adds to the lower-risk business profile the firm has pursued since the financial crisis.

Last year, this Wall Street investment bank agreed on a $13 billion purchase of discount brokerage E-Trade. With 5.2 million customers, it was once a revolutionary platform that “helped usher in a dramatic shift among financial services firms” and fueled the rise of indexes and exchange-traded funds, making investing vastly easier for do-it-yourself investors.

Investors receive a 1.90% dividend. The Goldman Sachs price target is $75. The consensus price objective is $72.10, and Morgan Stanley stock ended Thursday’s trading at $74.94 per share.

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Given that all four of these stocks are trading near the Goldman Sachs price targets, with the positive outlook for the companies for the back half of this year, the price targets could very possibly head substantially higher. Investors looking to add financials to portfolios can feel very comfortable adding these market giants as they pay solid dividends and have a very bright outlook for 2021 and beyond.

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