Some attaboys for bank stocks in season of pessimism

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Analysts haven’t shown a lot of love to bank stocks lately, but a few calls are swimming against the tide.

UBS AG upgraded Bank of America to buy, and is recommending adding exposure to large-cap bank shares as sentiment on stocks “has come full circle” after a dismal 2018, Saul Martinez wrote. At Citigroup Global Markets Inc., Keith Horowitz said it’s “tactical time to buy,” in a note boosting Morgan Stanley and Citizens Financial Group to buy.

That follows a cascade of pessimism in the past two days, including: Morgan Stanley lowering price targets and estimates for big banks like JPMorgan Chase and Citigroup; a sector downgrade to market weight, and downgrades of Wells Fargo and Northern Trust at Wolfe Research; Jefferies reducing price-target multiples, resulting in downgrades of JPMorgan, SunTrust Banks and U.S. Bancorp; Raymond James downgrading 13 banks; Macquarie cutting BofA to neutral, and Goldman downgrading PNC Financial Services Group to neutral.

“The ample de-rating of bank stocks since August creates an opportunity,” UBS’s Martinez said in a note dated Jan. 8. “We focus on fundamentals rather than tactical considerations (e.g. near-term catalysts) and feel that banks are pricing in profitability levels that are unlikely even with some credit normalization.”

The KBW bank index is down about 18% since the end of July. Bank shares are gaining in pre-market trading, helped by renewed trade hopes in addition to the upgrades. At midday, BofA and Morgan Stanley each had risen nearly 1%.

UBS also lifted Regions Financial to buy and M&T Bank to neutral, and now has eight buy ratings and no sells. Citi’s Horowitz said he’s taken “the opportunity to refresh” views after bank stock underperformance over the past year.

“We view the macro backdrop as healthy and more consistent with late cycle and not end of cycle,” Horowitz wrote. He also reinitiated on Fifth Third Bancorp with a buy and reiterated buys on Wells Fargo, Capital One Financial, American Express and State Street, and cut Bank of New York Mellon to neutral given recent outperformance.

Citigroup will kick off earnings for banks on Jan. 14. JPMorgan, Wells Fargo and some regionals are scheduled to report on Jan. 15.

Bloomberg News