One of the good things that often come out of desperate times, like the mortgage meltdown crisis of 2008 and 2009, is regulation that is put in place to make sure that kind of blowup doesn’t happen again. Each year now, financial institutions are subjected to the Dodd-Frank Act Stress Test (DFAST), which is a set of forward-looking exercises to ensure participating institutions have sufficient capital to absorb losses and support operations during adverse economic scenarios.

The DFAST is viewed in conjunction with the more comprehensive Comprehensive Capital Analysis and Review (CCAR) exercises, which offer details into each company’s capital plans. This year, all 34 participating companies passed the test, which is not only good news for investors, but good news for the country as a whole.

The RBC financials equity analysts did a thorough review of tests, and they make the case the industry is much stronger than before, and said this in the report:

With the DFAST results and expected capital plans that will be released this week, we believe the Fed has shown that the U.S. banking industry is very well capitalized and positioned to handle adverse economic scenarios. We continue to recommend that investors should be overweight the bank stocks.

We picked five of the firm’s favorite stocks to buy now, all are rated Outperform

Bank of America

The company posted solid first-quarter results, and it expects a significant increase in net interest income for the current quarter. 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 some 5,100 banking centers, 16,300 ATMs, call centers, online and a mobile banking platform.

The company reported quarterly revenue that handily beat consensus estimates and was up 7% from a year ago. And earnings blew out expectations. This is very good news, as Bank of America’s business continues to improve at a faster-than-expected pace.

Bank of America investors receive a 1.3% dividend. The RBC price target for the stock is $26, and the Wall Street consensus target is $26.07. The shares closed Friday at $22.82.

Citigroup

This top bank is trading at just above the level it was in the summer of 2015. 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 still very cheap 10 times estimated 2018 earnings, the bank looks very reasonable in what is becoming a pricey stock market. A continuing stock buyback program is a big positive. The company’s institutional clients group appeared to be holding its ground last quarter, and while guidance released in January was conservative and somewhat disappointing, it is cheap at this level.

Citigroup investors receive a 1.06% dividend. RBC has a $65 price target. The consensus price objective is $64.85, and shares closed Friday at $63.41.

JPMorgan

This stock trades at a reasonable 13 times estimated 2017 forward earnings and could respond good in a rising rate scenario. 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 formed through the merger of retail bank Chase Manhattan and investment bank JPMorgan.

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 company reported solid first-quarter results and continues to take advantage of revenue opportunities in new markets and with the credit card business.

JPMorgan investors receive a 2.34% dividend. The $95 RBC price target compares with the consensus target of $94.10. The shares closed Friday at $86.86.

PNC Financial Services

This top regional bank is a very solid play and the top pick at RBC. 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.

Shareholders are paid a 1.84% dividend. RBC has set its price target at $130, and the consensus target is $128.38. PNC closed Friday at $119.55.

Wells Fargo

This large cap bank is another stock for investors to look at now for safety, dividends and solid upside potential. Wells Fargo & Co. (NYSE: WFC) is a nationwide, diversified, community-based financial services company with $1.8 trillion in assets. The company provides banking, insurance, investments, mortgage and consumer and commercial finance through 8,700 locations, 12,800 ATMs, the Internet and mobile banking. It also has offices in 36 countries to support customers who conduct business in the global economy. Wells Fargo serves one in three households in the United States.

Wells Fargo has slowly, but surely, become one of the biggest mortgage lending companies in the United States, in addition to its normal banking and brokerage businesses. A continued increase in commercial real estate lending could really boost the bank’s bottom line and overall revenue. The stock also remains a top Warren Buffett holding.

First-quarter earnings were somewhat disappointing as spread revenues and efficiency were lower than estimates. In addition, a confusing Investor Day message, along with a slower spread income outlook, drove shares down almost 10% over the past two weeks. Top analysts feel the company is laying the foundation this year for a much better earnings outlook starting in 2018.

Wells Fargo shareholders receive a 2.92% dividend. The RBC price target is $60. The posted consensus target is $57.59. Shares closed Friday at $52.45.

Get Our Free Investment Newsletter

I have read, and agree to the Terms of Use

Sticking with the big money center leaders makes sense, especially with some volatility creeping back into the overall markets. The long-term outlook for all these large cap leaders is solid, and the financial strength that the stress tests confirm make the sector a very solid play for the second half of 2017.

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.