Last week ended with the worst day for bank stocks since the 2008 financial crisis. The collapse of Silicon Valley Bank, the nation’s 16th-largest bank and the lender of first resort for start-ups in the Californian tech world, sparked fears of a larger bank run, or even a repeat of systemic financial problems.
That’s the worst case scenario, but according to Goldman Sachs chief credit strategist Lotfi Karoui, those fears may be overblown.
“We believe the risk of contagion from small to large banks is low, given the low share of regional banks in the IG market. Similarly, the risk of a capital or liquidity event among large banks is also weak. We reiterate our overweight recommendation on the sector and would use any sell-off as an opportunity to add risk,” Karoui said.
Against this backdrop, Goldman analysts have recommended banking stocks that they see as potential winners for investors taking advantage of lower prices. We’ll take a closer look at two of these stock picks.
Charles Schwab (SCW)
The first banking institution we will look at is a household name, Charles Schwab. It is the largest publicly traded investment services firm in the United States and had $7.05 trillion in client assets at the end of 2022. The firm has a total of 34 million client accounts. brokerage, which matches its reputation for making equity investing more accessible to the retail mass. investors. In this niche, Schwab operates as both an investment manager and a discount broker and offers its clients a full range of banking and investment services.
Last January, Schwab announced mixed financial results for the last quarter of 2022 and the full year. For the quarter, net revenue of $5.49 billion was up 17% year over year, but missed consensus estimates of $60 million. Adjusted EPS of $1.07 was up 24% from a year earlier, but below the consensus estimate of $1.09.
On a yearly basis, Schwab reported net revenues of $20.7 billion, a year-on-year increase of 12%. Adjusted net income increased 19% year on year to $7.9 billion, and adjusted EPS increased 20% year on year to $3.90. Schwab gathered new assets totaling $428 billion in 2022 and added more than 4 million new customer accounts. In one of the company’s downers, he reported that new assets added were offset by lower market values during last year’s decline, leading to a year-over-year decline in total assets held.
In a sign of management confidence, Schwab declared its most recent common stock dividend. The payout, which was released Feb. 24, was increased 14% from the prior quarter to 25 cents per common share. At this rate, the annualized payment of $1 earns 1.7%. The company has a track record of maintaining reliable dividend payments since 1990.
Shares of Schwab reacted strongly to the collapse of SVB, falling 23% in the past two trading sessions.
Goldman 5-star analyst Alexander Blostein focuses on Schwab’s outlook, noting that the company has “enough liquidity to meet client needs without having to force-sell its AFS portfolio.”
“We estimate core deposit outflows in January were slightly below the 2022 monthly average, with a cumulative decline from 1Q22 to January of around 25%. While we believe the recent issuance of higher cost funding by SCHW is likely to weigh on the NIR in 1H23, management has reaffirmed its expectation for temporary use of these facilities, and we do not see the funding issues/ liquidity become more acute with certain institutions as warranted here. With the stock falling [29]% YTD, the risk/reward ratio remains attractive, in our view,” Blostein said.
Blostein quantifies his position with a buy rating for the stock and a price target of $98 that shows confidence in a 67% year-over-year upside potential. (To see Blostein’s track record, click here)
Overall, Schwab claims 15 recent analyst reviews, including 11 buys, 3 holds and a single sell, for a moderate buy consensus rating. The shares are trading at $58.70 and their average price target of $90.13 implies a one-year gain of 53.5%. (See SCHW Stock Forecast)
Bank of NT Butterfield & Son (NTB)
Next is a lesser-known name in banking, Bermuda-based Bank of NT Butterfield. This bank, whose market capitalization of $1.5 billion places it in the small cap category, serves high net worth clients in Switzerland, the United Kingdom and Singapore, as well as in Bermuda, the Cayman Islands, the Bahamas and the Channel Islands. The bank offers a wide range of specialist financial and wealth management services, as well as residential property loans in the UK.
Butterfield managed to put together a strong report in 4Q22, beating forecasts on both revenue and profit. Revenue rose 17.7% year over year to $148.5 million, beating the consensus estimate of $5.24 million. Non-GAAP EPS of $1.27 was also higher than analysts’ forecast of $1.14.
For 2022 as a whole, Butterfield reported net revenue of $549.3 million, a 10% year-over-year gain, while the company reported net net income of $214 million, an increase an even more impressive 31% year-over-year. Full-year diluted EPS showed the same 31% year-on-year improvement.
Of note to investors, Butterfield has maintained a regular common stock dividend payout of 44 cents per quarter since the summer of 2019. The next payout is scheduled for March 14, and the annualized payout, of $1.76, earns 5 .85 above average. %.
Like Schwab above, it appears to be a fundamentally sound bank that was hit by the sudden crisis last week. As of Friday’s close, Butterfield shares were down more than 14.5% from Wednesday’s levels.
That’s a cut Goldman Sachs would recommend – and that view is backed up by analyst Will Nance’s recent coverage of this stock.
“We see a number of reasons to be positive here with 1) management pointing to continued NIM expansion over the coming quarters as the company deploys excess cash into higher yielding securities 2) the company is approaching now off its target level on TCE/TA, and is likely to resume share buybacks, adding to the already attractive 5% dividend, and 3) fee income is much higher than expected, and while that likely benefits from some reopening tailwinds in the company’s markets, we believe this is one of the first signs of a more “normal” rate of pay for fee income after several years of travel restrictions in the company’s island markets,” Nance wrote.
“We believe NTB is an attractive holding for income-oriented investors, offering strong ~[6]% dividends and attractive capital allocation opportunities through share buybacks,” the analyst summed up.
Tracking this move, Nance assesses that NTB shares a buy, with a price target of $41 to suggest a 36% gain for the next 12 months. (To see Nance’s list of winners, click here)
All in all, it looks like the street is in line with the bulls on this one. There are 4 recent analyst reviews for Butterfield, and all four agree it is a stock to buy, making the Strong Buy consensus rating unanimous. The average price target is $41.50 and implies a one-year upside potential of approximately 38% from the current trading price of $30.09. (See BNT Stock Forecast)
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Disclaimer: The opinions expressed in this article are solely those of the analysts featured. The Content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.