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MORE UPSIDE FOR BANKS IN 2025 - KBW

With a market weight rating for U.S. banks, Keefe, Buyette & Woods analysts write that the sector has more room to rise with earnings tailwinds and "meaningful re-rating opportunities."

Christopher Mcgratty and David Konrad wrote that they see EPS growth resuming in 2025 to the tune of 6%-plus and for 2026 they expect 57% of banks producing 10%-plus EPS growth due to an improving net interest margin environment.

On an index level, they say that a P/E multiple of 11-12x could be justified for the KBW Bank index .BKX and 12-13x for the KBW Regional Banking index .KRX, "implying another 7% and 6% upside potential, and about 10% of re-rating potential relative to the S&P Equal Weight Index."

And they point to "pockets of outsized relative value" in larger global systemically important banks (G-SIBs) and banks with assets ranging from $50 billion to $100 billion.

On the G-SIB side, they list Citigroup C.N and State Street STT.N as having attractive risk reward opportunities with Citi's EPS growth expected to be 49% between 2024 and 2026 and State Street's estimated at 28% with both expecting to have 9% net interest income per share growth.

In the next group, they point to Western Alliance WAL.N, SouthState SSB.N, Old National Bank ONB.O and UMB Financial UMBF.O with EPS growth expected to range between 32% for UMB and 51% for Western Alliance.

The analysts note that the sector started to show signs of life in the spring of 2024 in terms of traditional merger and acquisition activity "building momentum leading up to and following the 2024 Presidential election" as they see optimism around deregulation under the incoming Trump administration as a "significantly positive factor."

In capital markets, they see strong upside in M&A and equity capital markets (ECM) revenues with debt capital markets (DCM) "currently over earning due to refinancing investment grade debt in 2024."

They see Goldman Sachs GS.N as having most revenue upside in this segment, but noted that Citi provides an inexpensive valuation as well as revenue upside. While STT doesn't have meaningful direct exposure outside of foreign exchange, it has "market sensitive revenues in asset management and custody."

On Tuesday, the KRX, which is up 15.7% year-to-date, is off ~2% on the day. The BKX, up ~36% YTD, is down 1.4% for the day so far.

(Sinéad Carew)

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