The Republican sweep, with lower taxes, and deficit-led growth plans is a "major tailwind" for banks, says analyst Betsy Graseck in Morgan Stanley's 2017 outlook.
The big banks should now be though of as "growth stocks," as they will outperform in a rising inflation environment.
A "new age of bank EPS growth" is upon us, she says. noting favorites like Bank of America (NYSE:BAC), Citigroup (NYSE:C), Goldman Sachs (NYSE:GS), JPMorgan (NYSE:JPM), BB&T (NYSE:BBT), PNC Financial (NYSE:PNC), Regions Financial (NYSE:RF), SunTrust (NYSE:STI), U.S. Bancorp (NYSE:USB), Bank of New York (NYSE:BK), Northern Trust (NASDAQ:NTRS), State Street (NYSE:STT), AmEx (NYSE:AXP), Capital One (NYSE:COF), Discover (NYSE:DFS), and Synchrony (NYSE:SYF).
Discover (NYSE:DFS) and Synchrony Financial (NYSE:SYF) are likely to "meaningfully outperform" American Express (NYSE:AXP) over the next two years, says Bill Carcache, advising clients take advantage of the big post-election rally in AmEx to cash out and instead put the money in DFS and SYF.
Carcache expects revenues per dollar of investment spending in Q4 to drop to "the lowest level AXP has ever seen in its existence as a public company."
Expense cuts may be able to buy time in masking "fundamental degradation," says Carcache, but investors won't wait until expense leverage is gone to begin unloading the stock.
Carcache rates AmEx a "reduce" with $63 price target (16% downside).
After a three standard deviation move in large-cap bank stocks, it seems logical to think about heading to the sidelines, says analyst Betsy Graseck. But should the names pull back, she recommends adding to positions as the bull case still outweighs the bear case next year.
Using base case 2018 estimates and a target P/E of 12x implies 14% upside for Morgan's eight Overweight-rated stocks. The bull case on 2018 estimates with the same target P/E means upside of 41%.
Top picks are Citigroup (NYSE:C), Synchrony Financial (NYSE:SYF) on stronger capital returns; Bank of America (NYSE:BAC) on higher rates and lower expenses; Goldman Sachs (NYSE:GS) on rising market volatility and improving VAR productivity; JPMorgan and Wells Fargo (NYSE:WFC) on stronger loan growth and expense management; Capital One (NYSE:COF) and Discover (NYSE:DFS) on rising consumer leverage and higher capital return.
Noting a pricey valuation after the stock's big run higher, analyst Chris Brendler downgrades Capital One (NYSE:COF) to Hold from Buy. As for possible positive catalysts from a Trump administration, Brendler doesn't think those will be felt for years. His price target of $84 compares to Friday's close of $80.99.
At this point, he's more upbeat about Discover (NYSE:DFS) as it has lower risk and is more leveraged to the changes being sought by Trump.
Missed payments on recently-issued credit cards are higher than that on older cards, according to TransUnion - almost 3% of outstanding balances on credit cards issued in 2015 were at least 90 days six months after origination versus 2.2% for cards issued in 2014 and 1.5% for 2013.
That's pushed up the overall 90 days late or more average to 1.53% in Q3 - the highest level since 2012.
The renewed push into subprime lending is likely the culprit - more than 20M credit cards were issued to subprime borrowers in 2015, up 20% from 2014 and 56% from 2013, according to Equifax.
Taking a look at oil patch states, the share of card balances 90 days or more past due in Q3 rose 12% Y/Y in Oklahoma, 10% in Texas, and 20% in Wyoming.
Q2 net income (after backing out a tax benefit) of $572M or $1.36 per share vs. $599M and $1.33 one year ago.
Total loans up 4% Y/Y to $71.9B. Credit card loans up 4% to $57.2B. Card sales volume up 2%.
Total net charge-off rate excluding PCI loans up 11 bps to 2.27%; total delinquency rate over 30 days past due up 11 bps to 1.60%.
Direct Banking pretax income of $868M down $46M Y/Y, wit higher net interest income and lower operating expenses more than offset by higher provisions and lower other income (increased promotional awards and discontinuation of mortgage operation). NIM of 9.95% up 32 bps. Provisions of $441M up $105M from a year ago. Reserve build of $27M driven mostly by loan growth; Q2 a year ago had a reserve release of $41M. Expenses down 2%.
Payment Services pretax income of $30M up $2M Y/Y.
7.8M shares repurchased during quarter for $425M, cutting the float by 1.9%.