How will big banking stocks react to settlement announcements?

By Chris Lau for Kapitall.

Improving lending conditions should help buoy companies in the financial sector in the coming months. In particular, I think that two very beat up companies, Citigroup (C) and Bank of America (BAC), are attractive rebound plays. Bank of America recently worked out a settlement with the Department of Justice, which removes an uncertainty that held back its share price.

Last month, Citi was cleared of any further enforcement by the SEC after an investigation of Citi’s involvement with MBSs (mortgage-backed securities).

Goldman Sachs (GS) warmed to Bank of America after it raised its price target of the bank’s shares to $19, up from $17. Goldman cited the settlement will cut legal costs. However, upside for Bank of America will really only accelerate if the company boosts dividends and generates better earnings in the next few quarters.

Citigroup is turning itself around by selling non-core businesses. It recently sold 41 branches to BB&T (BBT). BB&T has a good track record managing branches effectively. The deal benefits both companies. BBT, a financial holding company is undervalued and could rebound as well if its return on equity (“ROE”) supports growth in the years ahead.

Citi is also exiting Japan, because profitability is challenging in that region.

Risks

Fed officials could enforce higher capital surcharges against the banks in the future which would require firms keep more capital on their books. However this action would also restrain credit. 

Conclusion​​

The dark cloud on Bank of America may be lifting, while Citi’s discount to book value will attract income and value investors. If Citi meets its estimated $5.38 earnings per share next year, it suggests the company is trading at a significant discount.

Click on the interactive chart to view data over time. 

1. Bank of America Corporation (BAC): Provides banking and financial services to individuals, small- and middle-market businesses, corporations, and governments primarily in the United States and internationally. Market cap at $176.56B, most recent closing price at $16.79. 

 

 

2. BB&T Corporation (BBT): Operates as the financial holding company for Branch Banking and Trust Company that provides banking and trust services to small and mid-size businesses, public agencies, local governments, and individuals in the United States. Market cap at $27.46B, most recent closing price at $38.16. 

 

 

3. Citigroup, Inc. (C): Provides consumers, corporations, governments, and institutions with a range of financial products and services. Market cap at $158.8B, most recent closing price at $52.38. 

 

 

4. The Goldman Sachs Group, Inc. (GS): Provides investment banking, securities, and investment management services to corporations, financial institutions, governments, and high-net-worth individuals worldwide. Market cap at $80.7B, most recent closing price at $183.17. 

(List compiled by Chris Lau. Monthly returns sourced from Zacks Investment Research.)

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