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 banking firm and first lender to California’s tech world startups, has sparked fears for a bigger bank run, or even a repeat of the systemic financial problems.
Those are the worst concerns, but according to Goldman Sachs chief credit strategist, Lotfi Karoui, these fears may be exaggerated.
“We think 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 in large banks is also small. We reiterate our overweight recommendation to the industry and would use any major sell-off as an opportunity to add risk,” Karoui said.
Against this backdrop, Goldman analysts are recommending bank stocks they believe are potential winners for investors who benefit from the price decline. We’ll take a closer look at two of these stock picks.
Karl Schwab (SCHW)
The first banking institution we look at is a well-known name, Charles Schwab. This is the largest publicly traded investment services company in the US and had $7.05 trillion in client assets at the end of 2022. investors. In that niche, Schwab operates as both an asset manager and a discount brokerage, offering its clients a full range of banking and investment services.
Last January, Schwab reported mixed financial results for the last quarter of 2022 and the full year. For the quarter, net sales of $5.49 billion were up 17% year over year but missed consensus estimates by $60 million. Adjusted earnings per share of $1.07 were 24% higher than last year, but below the consensus estimate of $1.09.
On a year-over-year basis, Schwab saw net sales of $20.7 billion, an annual increase of 12%. Adjusted net income grew 19% year-over-year to $7.9 billion, and adjusted earnings per share increased 20% year-over-year to $3.90. Schwab accumulated a total of $428 billion in new assets by 2022 and added more than 4 million new customer accounts. In one of the company’s downers, it reported that the new added assets were offset by lower market values in last year’s bear, resulting in a year-over-year decline in total assets held.
As a vote of confidence from management, Schwab announced its most recent dividend on common stock. The payment, due Feb. 24, was increased 14% from the previous quarter to 25 cents per common share. At this rate, the $1 annual payment yields 1.7%. The company has a history of reliable dividend payments, dating back to 1990.
Shares in Schwab reacted strongly to the collapse of the SVB, falling 23% over the past two trading sessions.
Goldman’s 5-star analyst Alexander Blostein focuses on Schwab’s prospects, noting that the company has “enough liquidity to meet customer needs without having to force sell its AFS portfolio.”
“We estimate that core deposit outflows in January were slightly worse than the 2022 monthly average, with a cumulative decline of ~25% in Q1 Jan 22. While we think the recent issuance of more expensive funding from SCHW is likely to weigh on NIR in 1H23, management reaffirmed their expectations for a temporary use of these facilities, and we don’t see funding/liquidity issues becoming more acute with some financial institutions such as justified here. With the stock down [29]% YTD, we believe the risk/reward remains attractive,” said Blostein.
Blostein quantifies his stance with a Buy rating for the stock and a $98 price target, which shows that he is confident of 67% upside potential over a year. (Click here to view Blostein’s track record)
Overall, Schwab claims 15 recent analyst ratings, including 11 Buys, 3 Holds, and a single Sell, for a moderate buy consensus rating. The shares are trading for $58.70 and their $90.13 average price target implies a one-year gain of 53.5%. (To see SCHW stock forecast)
Bank of NT Butterfield & Son (NTB)
Next up is a lesser-known name in the banking industry, the Bermuda-based Bank of NT Butterfield. This bank, which falls into the small-cap category with a market cap of $1.5 billion, serves affluent clients in Switzerland, the UK 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 loans for homes in the UK.
Butterfield managed to put in a solid 4Q22 report, beating forecasts on both the top and bottom lines. Revenue increased 17.7% year over year to $148.5 million, beating the consensus estimate by $5.24 million. Non-GAAP EPS of $1.27 also beat the analyst forecast of $1.14.
For 2022 as a whole, Butterfield posted net sales of $549.3 million, a 10% year-over-year gain, while the company posted net income of $214 million, an even more impressive 31% year-over-year increase. Full-year diluted earnings per share showed the same 31% year-over-year improvement.
Notably for investors, Butterfield has maintained a regular quarterly dividend payment of 44 cents since the summer of 2019. The next payout is scheduled for March 14, and the annualized payment of $1.76 yields an above-average 5.85. %.
Like Schwab above, this appears to be a fundamentally sound bank that was hit by the sudden crisis last week. By the end of Friday, shares of Butterfield were down more than 14.5% from Wednesday’s levels.
That’s a dip Goldman Sachs would recommend – and that view is supported by analyst Will Nance’s recent reporting on the stock.
“We see a number of reasons to be positive here, with 1) mgmt pointing to continued NIM expansion over the next few quarters as the company deploys excess liquidity in higher yielding securities 2) the company now approaches its target level at TCE/ TA, and is likely to resume share buybacks, adding to the already attractive 5% dividend, and 3) fee income coming in much stronger than expected, and while likely benefiting from the rebound in the wind in the company’s markets, we believe this is one of the first signs of a more ‘normal’ fee revenue run rate following several years of travel restrictions in the company’s island markets,” Nance wrote.
“We believe NTB is an attractive holding company for income-oriented investors, who want solid ~[6]% dividends and attractive capital allocation opportunities through share buybacks,” the analyst summarized.
Tracking this ahead, Nance rates NTB stock a buy, with a $41 price target to suggest a 36% gain over the next 12 months. (Click here to view Nance’s track record)
Overall, it looks like the street is in line with the bulls on this one. There are 4 recent analyst ratings for Butterfield, and all four agree that it’s a stock to buy, making Strong Buy’s consensus rating unanimous. The average price target is $41.50 and implies a one-year upside potential of ~38% from the current trading price of $30.09. (To see NTB stock forecast)
To find great ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a tool that brings together all of TipRanks’ stock insights.
disclaimer: The opinions expressed in this article are solely those of the named analysts. The content is for informational purposes only. It is very important to do your own analysis before making an investment.
