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Competition among peer-to-peer payment apps like Venmo, PayPal, Cash App and Zelle have been heating up for the past 10 years. The big banks tried to compete in the space when PayPal first came on the scene 25 years ago, but their business models failed. Now, Zelle, a seven-bank platform, is outpacing its rivals in average transaction value. But a rise in reported fraud activity recently got the attention of Congress, with allegations that the banks aren’t supporting those affected customers.
Wells Fargo analyst Mike Mayo named Bank of America his top pick for 2023 on expectations for “near best-in-class” growth in net interest income, profit margins and earnings. The stock should merit a higher multiple this year and can climb 55% from its price on Tuesday, Mayo wrote in a note published that day. The country’s second biggest bank by assets exemplifies Mayo’s bull thesis for banks, which is that they will weather the impending economic downturn better than expected because the industry has spent the past decade reducing risk across businesses. “As much as any bank, it is ‘showtime’ for BAC if, as we expect, the onslaught of higher rates leads to greater NII growth, more business volume demonstrates model scalability, and slower economic growth further proves BAC’s resiliency after years of de-risking,” Mayo wrote. The veteran bank analyst’s call clashes with several of his peers, who published bearish notes last month that cited expectations for a U.S. recession in 2023. Higher reserves for bad loans, rising expenses and funding costs for deposits, and moribund results in wealth management and investment banking were predicted by the pessimistic analysts. To be fair, Bank of America was also Mayo’s top pick at the start of 2022. After a strong start to the year, investors bailed on banks amid worries that an impending recession will lead to higher defaults. Shares of the Charlotte, North Carolina-based bank fell 26% last year, worse than the 15% decline of rival JPMorgan Chase and the 24% drop of the KBW Bank Index . “Our view is that this stemmed from recency bias from the Global Financial Crisis and ignores what amounts to perhaps the greatest amount of de-risking of any large bank, esp. based on the Fed stress test,” Mayo wrote of last year’s stock decline. Mayo’s other top picks are U.S. Bancorp and PNC Financial , both of which should beat consensus earnings by at least 6% over the next two years, Mayo wrote. His favored banks should be able to address investors’ concerns better than competitors by holding onto gains in net interest income, exhibit good expense control and “superior” credit quality, he wrote. — CNBC’s Michael Bloom contributed to this report.
Banks finally got a long-awaited boost to interest rates this year after a decade of toiling in a low-rate environment. It didn’t go as planned. A year ago, big lenders including Bank of America and Wells Fargo were the top picks of the analyst community because they were expected to benefit from higher rates . Loan growth coupled with vast deposit bases would drive gains in interest income as the Federal Reserve hiked rates, the thinking went. While that trend played out, the bull case was spoiled by inflation at four-decade highs, which forced the Fed to boost rates more than expected , triggering concerns of a recession. In a downturn, banks are exposed to surging loan defaults, reduced loan demand and write-downs on assets. That’s why the KBW Bank Index slumped 23% through mid-December, worse than the 17% decline of the S & P 500 and on track for its worst year since 2008. “The interest rate-trade is getting long in the tooth, and meanwhile there are uncertainties on deposits, both on costs and outflows,” David Konrad, a KBW analyst, told CNBC in a phone interview. He cut his recommendation on the sector to market weight from overweight last week. Net interest income growth will probably peak in this year’s fourth quarter at 30% and slump to just 5% by the end of 2023, Konrad said in a Dec. 13 note. Among banks, he favors Goldman Sachs and Morgan Stanley because “they have already been operating in a recession” and their capital markets businesses will rebound before retail banking does, he said in the interview. Multiple headwinds Headwinds faced by banks next year include expectations for shrinking loan margins in the second half, higher reserves for bad loans, rising funding costs for deposits, higher expenses due to wage inflation and continued pressure on mortgage , wealth management and investment banking revenue, according to Raymond James analysts led by Daniel Tamayo. “With many of our positive catalysts from 2021-22 played out, we believe 2023 will be volatile for bank stocks, with the best performers those who can withstand headwinds for the industry,” Tamayo said in a Dec. 15 note. Tamayo favors smaller banks over megacaps for their lower valuations, less strict regulatory oversight and the possibility of mergers. He has a strong buy rating on Cadence Bank , Huntington Bancshares , First Republic and Wintrust Financial. Hold off until 2024? In that vein, Morgan Stanley analyst Betsy Graseck advised that it was too early to go long large cap banks. Investors should pile into the sector only after loan delinquencies peak or the Fed ends its balance sheet-shrinking campaign known as quantitative tightening, she said in a Dec. 6 note. “It’s not enough for the Fed to just slow or stop hiking rates, it has to end QT to get more positive on the banks,” Graseck said. That’s because “we expect that credit is likely to surprise more negatively than positively over the next 12 months as the economy deals with still-high inflation, higher borrowing costs” and rising joblessness, she added. The wait could be long: Morgan Stanley economists see QT ending in the first half of 2024. The bull case On the other hand, the group could rally next year if the economy manages a soft landing or mild recession, Bank of America analyst Ebrahim H. Poonawala said in a Dec. 11 note. Much of the downside for the industry is already embedded in current valuations, according to Baird analyst David George. That could set up the inverse of 2022 – a year in which pessimism leads to better-than-expected stock returns. Veteran analyst Mike Mayo of Wells Fargo said that bank stocks could pop 50% in 2023 by proving their resilience in a recession. That’s because they’ve been de-risked over more than a decade of increasingly stringent financial regulations. “We think banks should perform better in an upcoming recession than for any other in modern history,” Mayo said in a Dec. 14 note. “What seems most underappreciated is the degree that bank structural changes over the past decade prepare the industry for the cyclical challenges ahead.” His top picks are Bank of America, U.S. Bancorp and PNC Financial Services . The three lenders are prepared to navigate a downturn with strong credit quality, lower expenses and higher efficiency, he said. —CNBC’s Michael Bloom contributed to this report.
Berkshire Hathaway sold a portion of U.S. Bancorp , a bank stock that the conglomerate has held since late 2007, a regulatory filing with the Securities and Exchange Commission showed. The conglomerate reported owning 52.5 million shares of U.S. Bancorp as of Oct. 31, roughly 3.5% of the bank’s outstanding shares, the filing showed. That’s down from a stake of 137.4 million shares, including 17.6 million held by its New England Asset Management subsidiary, as of the end of the second quarter on June 30. The filing indicates that Berkshire has sold 84.9 million shares, currently valued at $3.8 billion. The sale was prompted by Berkshire’s stake falling below 5%, the filing stated. The filing also showed that Buffett himself owns almost 499,000 shares in his personal accounts. Buffett first bought 23.3 million shares of U.S. Bancorp in the fourth quarter of 2007 . Shares of U.S. Bancorp are down about 20% this year, compared to a roughly 17% loss for the S & P 500. Berkshire started unloading its bank stocks this year, exiting positions in JPMorgan, Goldman and Wells Fargo. The conglomerate still owned a sizable stake in Bank of New York Mellon at the end of the second quarter.