The following is a list of top financial stocks which have significantly outperformed the broader markets Year to Date in 2012. As compared to S&P500's gain of 4.67%, these stocks have posted gains of at least 20% so far in 2012.
% Change in Stock Price YTD
Bank of America Corporation
The Goldman Sachs Group, Inc.
ICICI Bank Ltd.
ING Groep NV
Lloyds Banking Group plc
The Royal Bank of Scotland Group plc
I see a good likelihood of further upside in Bank of America, ICICI Bank and Goldman Sachs.
Bank of America is trading at over 40% of its tangible book value making it an attractive buy candidate. Over the past couple of months, BofA has executed on several asset sales that are consistent with management's efforts to strengthen the balance sheet and improve the company's overall capital position. The company reported improvement in its regulatory capital ratios in the most recent earning release and its management increased their guidance related to Basel III targets.
In quantitative terms, BAC saw $75 billion reduction in RWA in 4Q'11, leading to a $171 billion reduction for full-year 2011. Management increased its target Tier 1 common ratio to 7.25- 7.5% by year-end 2012 as pro forma RWA is expected to be $50 billion lower and capital deductions have been significantly reduced. These ratios are still lower than its peers but the trend seems to be headed in the right direction and it is likely that the company will be able to hit Basel required levels. The company is still trading at a significant discount to its peers and as the broader macro situation in Europe continues to improve I see a good likelihood of the stock continuing its upward journey.
ICICI Bank is the top Indian private sector bank. India central bank - Reserve Bank of India - has recently reversed its tightening cycle with 50bps cut in CRR. The central bank has acknowledged that the risks to domestic growth have heightened and it is expected that it will start cutting its repo rate from March, 2012. India's headline inflation number also continues to move lower on account of a favorable base effect and a sharp decline in food inflation, giving more space for RBI to lower rates. Clearly, ICICI Bank stands to gain from this reversal in monetary cycle given it is the largest private sector bank in India. ICICI Bank is currently available at just 1.3x Book Value which is attractive given its leadership position in financial services space of the fast growing Indian Economy.
Goldman Sachs is a global investment banking, securities and investment management company providing a range of financial services to a client base that includes corporations, financial institutions, governments and high-net-worth individuals. Goldman Sachs is currently trading at 0.9x TBV. I believe its multiple will gravitate back towards 1.5x once the backdrop improves with Investment Banking revenues gaining momentum from 2011 levels. Also, 2012 has easy comps vs. 2011. This coupled with a rapid re-risking and client re-engagement will help Goldman Sachs business in the near term and lead to multiple expansion.