The Ratings Game: Record deal-making and favorable credit market conditions helped offset modest loan growth at big U.S. banks, analysts say

Analysts took a shine to Bank of America’s loan growth and issued mostly positive comments on Wells Fargo and Morgan Stanley as Wall Street sifted through a flurry of earnings updates from major banks this week.

Citigroup’s earnings drew a price cut from one analyst, however.

The results from the four big banks did not appear to inspire any major upgrades or downgrades on any of the stocks a day after they issued their third-quarter earnings, although analysts adjusted their earnings targets in some cases.

Raymond James analyst Daniel Tamayo said a key takeaway from Bank of America’s

third-quarter results was loan growth over the last two quarters that has begun to show signs of increased demand.

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Improved calling efforts from commercial relationship managers and growing demand for credit stoked loan increases in the bank’s commercial unit, he said. Small business lending has also started to grow. Credit card volume is also expected to increase with a boost in seasonal activity in the fourth quarter.

Jefferies analyst Ken Usdin hiked his 2022 profit estimate for Bank of America to $3.10 a share from $3 and lifted his view on 2023 earnings to $3.45 from $3.30. He maintained a hold rating on the company.

Usdin cited higher revenues and better credit, partially offset by higher costs. Jefferies also expects net interest income to increase modestly in the fourth quarter, “as higher loan balances, premium amortization benefits, and additional liquidity deployment” offset a decline in income from the government’s PPP lending program.

Raymond James analyst David Long reiterated an outperform rating on Wells Fargo

and said the company’s share price drop on Thursday was “undeserved.”

He hiked his 2022 profit target for Wells Fargo by 12 cents to $3.87 a share and increased his 2023 earnings estimate by 12 cents a share to $4.22 to reflect positive updates from the bank, which is valued at a discount to its peers.

“The quarter was highlighted by modest loan growth, favorable credit metrics, and an improving core expense base,” he said. “We remain bullish on WFC shares as we continue to believe profitability is set to improve, led by core fee-based revenue acceleration, expense rationalization continuing, and the returning of excess capital to shareholders via share repurchases.”

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Jefferies analyst Daniel T. Fannon reiterated a buy rating on Morgan Stanley

and said the bank’s investment banking business is powering its results. Fannon increased his fourth-quarter earnings estimate for Morgan Stanley to $1.95 a share from $1.60 a share and lifted his view for 2022 earnings to $7.90 a share from $7.41 a share. He also lifted the firm’s price target on Morgan Stanley to $121 a share from $119 a share.

“These changes predominantly reflect the ongoing strength in investment banking in the short-to-intermediate term,” Fannon said. “Growth trends also remain robust within wealth management as net new assets set a record in the period.”

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Morgan Stanley’s investment banking revenue of $2.8 billion marks the fourth such new high in the last six quarters, he said.

“While the debate around sustainability of investment banking fee levels continues, management described current investment banking pipelines as ‘healthy across sectors and regions’ with an expectation that activity will ‘continue on the back of current momentum’,” Fannon said.

Kenneth Leon, an analyst at CFRA Research, reiterated a hold rating on Citigroup

and lowered his price target by $4 a share to $76 a share. But he raised his 2021 earnings estimate for the bank by 30 cents a share to $10.35 a share, but keeps his 2022 estimate unchanged at $8.20 a share.  

Citigroup faces execution risk in its consumer bank unit downsizing to four Asian and Europe, Middle East and Africa markets in Singapore, Hong Kong, United Arab Emirates and London, as well as economic risks in Latin America, he said. Global card income fell 3%, while its peers showed growth.

This post was originally published on Market Watch

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