The news last week
that all 23 major banks passed the Fed’s stress tests sent bids immediately flowing into their shares. They all either met or exceeded the minimum capital requirements and as such, the way is cleared for them to reinstate their dividends and share buyback program. Understandably, investors are excited about this.
These had been on hold since the onset of the COVID pandemic, and investors who were left to depend on capital gains in the meantime will be more than happy to see their return. In addition, with interest rates finally moving north, banks and their investors have another hearty tailwind to support their positions. As we pass the halfway point of 2021 and round the corner into Q3, here are three banks set to do particularly well in the coming months.
Bank of America shares are currently trading at their highest levels since 2008 and look good value to surpass even those highs in the near future. It would require an additional 30% move from current levels but the scene is set for that to happen.
In light of last week’s news that they aced their stress test, Bank of America’s leadership came out on Monday with plans to boost their dividend by 17%. Their $25 billion share repurchase plan has also gotten the greenlight and shares are already up 8% on last week as a result.
Earlier this month the Credit Suisse team reiterated their Outperform rating on Bank of America’s shares, as well as their $46 price target. Hitting that would put them at a fresh multi-year high and take an even bigger chunk from the fast dwindling gap between here and their all time highs at $55.
If you thought Bank of America were making a statement with a 17% increase to their dividend, take a look at Goldman. They raised more than a few eyebrows on Monday with their plans to bring in a 60% hike after the company's stress test resulted in a stress capital buffer of 6.4%.
Chairman and CEO David Solomon commented with the news; "the planned increase in our dividend demonstrates our confidence in the increasing durability of our franchise revenues and is consistent with our capital management framework of prioritizing investment in our client franchise and returning excess capital to shareholders".
It’s also consistent with the solid returns that Goldman has been pumping out. Their Q1 earnings report had revenue up more than 100% year on year as it hit a fresh quarterly record while in recent weeks Jefferies upped their rating on the Wall Street giant to a Buy. Their price target of $450 implies there’s decent upside to be had in the region of 20%.
Morgan Stanley (NYSE: MS)
Going off returns alone, Morgan Stanley shares are the best performing of the three over the past few years. While Bank of America and Goldman Sachs have seen their stock rally 200% and 185% respectively since 2010, Morgan Stanley’s stock is up 300%. Like the other two, they’ve big plans in store since passing the stress tests and told investors on Monday about them.
Not only are they going to boost their dividend by 100%, they’re also going to kick off a fresh $12 billion share repurchase program that’s set to run through next summer. Chairman and CEO James Gorman commented with the news that "Morgan Stanley has accumulated significant excess capital over the past several years and now has one of the largest capital buffers in the industry".
Small wonder then how their shares are up almost 10% in the past week as they look set to reclaim the new all time high
that was tagged at the start of the month. This comes despite the CEO setting a cautious tone two weeks ago when he spoke about their next earnings report. As part of an address during the Morgan Stanley U.S. Financials, Payments & CRE Conference, CEO James Gorman said "net-net the quarter's going to be good, but more normalized than the unusually strong growth in previous quarters”. Investors have been quick to look past this though and you should too.
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