2 bank stocks to benefit from higher returns by TipRanks

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© Reuters. 2 bank stocks to benefit from higher returns

The narrative from the US Federal Reserve is that interest rates will most likely be increased at the end of 2022 after a period of asset purchases tapering off earlier in the same year.

When interest rates rise, there is usually a period of stock turnover due to a more value-based approach by investors. Rising interest rates lead to uncertainty about the future cash flow of growth stocks, which means investors are turning to more value-oriented stocks, especially those that offer dividends.

The sector that behaves best during periods of rising interest rates is financial services, particularly banking. The reason is that banks’ profit margins increase as they charge higher loan premiums. There is also the retrospective growth factor of GDP leading to a strong economy, which drives up rates.

I’m bullish on Goldman Sachs (NYSE 🙂 and Citigroup ‘s (NYSE 🙂 stocks. They are also my top picks in banking.

Goldman Sachs

Goldman Sachs topped second-quarter revenue estimates with record investment banking income and a retracement in M&A, advisory and corporate lending units.

Goldman generated net interest income of $ 1.63 billion compared to $ 1.48 billion in the first quarter and $ 944 million in the second quarter of 2020. Investment Banking division revenue also increased 36% year on year, while asset management revenues ($ 5.13 billion) more than doubled from a year ago.

If we look at the PE ratio (6.9) out of isolation by incorporating its PEG (0.4), it is valid to conclude that the growth rate of the company always exceeds the share price.

In addition, Goldman recently increased its quarterly dividend by 60%. Steady dividend growth could be favored by investors in an environment of higher interest rates, which in turn could push up the share price.

Wall Street analysts believe Goldman is a moderate buy with an average price target of $ 433.18 for the next 12 months. There were eight buy ratings, two keep ratings and one sell rating on the stock.

Citigroup

Citi is a stock that many have been optimistic about since the company’s new CEO, Jane Fraser, took over in February.

It is expected that Fraser will focus on the Asset Management division, while cutting other less profitable divisions, such as Consumer Banking in Mexico.

Citi’s revenue growth has been disappointing over the past five years, but signs of a more efficient business have been communicated in the bank’s second quarter results. Total revenue declined $ 2.3 billion, but net profit increased $ 5.1 billion, an increase of 486.5 percent year-on-year.

Citigroup has managed to reduce its cost of capital by 57% since early 2020, and based on the trajectory, that figure could drop to 5.2%. Citi’s debt-to-equity ratio has decreased by 56% since November 2020; the fall in the debt ratio coupled with the fall in the cost of capital means that the fair value of investors’ assets has increased.

Wall Street analysts believe Citi is a strong buy, with seven analysts placing buy ratings on the stock and none placing hold or sell ratings. Citigroup’s average price target is $ 88.71, which implies a potential upside of 26.4%.

Concluding thoughts

These two stocks trade at a haircut, with Goldman being a pure value game and Citigroup being a bet based on asset valuation metrics.

These stocks will certainly benefit from higher returns.

Disclosure: At the time of publication, Steve Gray Booyens had a long position in GS.

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