In the last three months, big U.S. banks like Bank of America, Wells Fargo and JP Morgan Chase have gained about 20 percent, which has naturally brought up the question of whether they’ve run their course and it’s time to do some profit taking. Surprisingly enough, there are some well-respected names who believe that this thinking may be at least a little bit premature.
One of them is Morgan Stanley’s Betsy Graseck. In spite of those big gains, she is still overweight on big banks, and is happy to explain why:
“Stocks are up 20%+ and some investors are taking profits and peeling back exposures. We think this is a mistake. Yes, large cap banks are trading relatively in-line with historical multiples, but that’s on current EPS estimates. There are several positive catalysts this year: stable-to-lighter touch on regulation, infrastructure spend, deficit-led growth, rate hikes and potential for lower taxes… all materially positive for banks. We believe both our own and Street estimates for 2018 should rise as some of these catalysts come through over the next 12-18 months. We see a high probability of some of the bull case migrating into the base case as the year progresses. Timing of these catalysts is uncertain, and if we move to the sidelines now we will likely miss the next uptrend.”
Graseck actually considers Citigroup her favorite pick, saying that the moratorium on financial regulation has benefitted it the most. Citibank, however, presents a unique situation. It is, of all the big U.S. banks, the most internationally focused.
While Citibank has, in recent years, simplified and slimmed down its operations, it still has much more exposure internationally. And what that means in terms of the bottom line is that any regulations resulting in a constriction of trade would almost certainly decrease the bank’s cross-border capital flows.
Unfortunately, that is exactly what the new administration is planning to do.