Bullish Case For Money Centre Banks In 2025
(MENAFN- The Arabian Post) Arabian Post -
Matein Khalid
US money center banks/I-banks had their best year in 2024 since the pre-Covid Stone Age. My fav turnaround names Citi and Wells Fargo exceeded my wildest expectations while the prospect of light touch regulation and M&A/IPO underwriting jackpot made Goldman Sachs and Morgan Stanley go ballistic. Despite the post Dec FOMC fireworks, this sector will have winners if bought at the right price even though risk abound in geopolitics, the trump 2.0, resurgent inflation and the financing cliff in commercial real estate.
Trump's picks for the Treasury, the SEC and the FTC are all pro banking. The Powell Fed will continue to cut rates as long as the path to disinflation is not derailed by a Trumptard policy mistake. Loan growth is accelerating and the yield curve will steepen as the economy delivers 3% GDP growth. Hopefully, Senator Pocahontas (aka Liz Warren) from the People's Republic of Massachusetts will not torpedo bank deregulation in Congress. While US consumer confidence is fine, it has plunged to all time lows in China while Paris/Berlin face a dangerous political vacuum even as the Ukraine war rages. The trade war with China could also get ugly.
I was most bullish on Wells Fargo below 50 but the bank has now rerated to 70, a tad below fair value. In fact, I would prefer to buy Bank of America if/when it falls to 40. However, I totally agree with Mike Mayo that 2024 was the year to kiss the perennial ugly duckling of New York money center banking (Citi) and 2025 will be no different.
Jane Frazer's turnaround plan at Citi has serious momentum while the valuation is still modest at 9.8 times forward earnings and a 25% discount to tangible book value even as J.P. Morgan trades at 2 times book. A spread that more than compensates for the sector swan and the sector sad sack. The North America credit business is on a roll, the investment bank will benefit from the debt/equity underwriting boom and M&A bonanza, the global corporate bank/transaction services div remains Citi's jewel in the crown. If Frazer succeeds, Citi will raise its returns on tangible equity from the current mediocre 7% to her 11-12% target by end 2026.
Goldman Sachs had more than priced-in the post-Trump projected snap back in the investment banking cycle the Street expects in 2025. I also find it difficult to go long Morgan Stanley while its net interest rate margin contracts, sweep accounts see wealth management outflows and valuation is stretched since this is no longer the pure play capital markets bank it was under John Mac
The miserable performance of commodities tells me that China is exporting deflation to the world. Dr. Copper/iron ore are in the doghouse while eggs, cocoa and coffee are flying high. If I am right, the Powell Fed will pivot to easy money faster than the futures markets project, a bullish omen for bank stocks until deflation hits Planet MAGA.
via Bullish case for money centre banks in 2025
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