In the wake of last week’s bank collapse – the fall of Silicon Valley Bank, and the related collapses of the crypto-centered Silvergate and Signature banks – there’s been a swirl of discussion around fractional reserves and liquidity coverage ratios (LCRs). And rightly so, because at bottom, these banks collapsed due to a lack of liquid assets. In sort, these banks did not have enough liquidity to cover severe funding outflows.
The affected banks, especially SVB, were hit by a run – that is, depositors came calling to withdraw cash assets – and they lacked the liquid resources to meet that demand. Best practices in the banking industry would require an institution to keep a liquidity coverage ratio sufficient to cover all accounts; that is, high-quality liquid assets suitable to cover cash demand for 30 days. Without such coverage, the bank cannot meet depositor demand, and will rapidly fall into insolvency.
Against this backdrop, J.P. Morgan analyst Vivek Juneja has highlighted two big names that have more than enough liquidity to cover rapid cash demands.
Noting that each has the potential to generate double-digit returns for investors, the 5-star analyst rates them both as ‘Buys.’
US Bancorp (USB)
We’ll start with US Bancorp, the parent company of US Bank. This Minneapolis-based bank holding company is the country’s 5th largest banking institution, with $674.8 billion in total assets, more than 3,100 brick-and-mortar banking branches, and over 4,800 ATM machines. The bank operates mainly in the West and Midwest of the US, and is considered by Federal regulators to be a ‘systemically important’ banking institution.
In the most important metric, for right now, JPMorgan’s Juneja notes that US Bancorp has a liquidity coverage ratio of 122%. For depositors, this means that the bank has nearly 1/4 more cash than is required to meet 30-days’ demand; from an investors’ perspective, it means that the bank has a degree of insulation in event of a crisis.
However, like most of the bank stocks on Wall Street, USB shares dropped 20% in the past three trading days. For Juneja, that may seem like the kind of dip that could be a buying opportunity.
“Earnings should benefit in 2023 from a large amount of noninterest bearing deposits from UB and cost synergies. However, management also expects sizable growth in non-interest income in 2023… We rate U.S. Bancorp Overweight relative to peers as it should benefit more than peers from continued strong consumer spending, which should drive growth in card-related fees. US Bancorp has higher share of revenues from card-related fees,” Juneja opined.
Looking forward from this stance, Juneja adds a $52.50 price target, implying a 44% one-year upside potential, to go along with his Overweight (i.e. Buy) rating on the shares. (To watch Juneja’s track record, click here)
Overall, there are 17 analyst reviews on file for USB, breaking down to 7 Buys and 10 Holds and giving the stock a Moderate Buy analyst consensus rating. The stock is selling for $36.54 and has an average price target of $54.78, suggesting ~50% upside on the one-year horizon. (See USB stock forecast)
Bank of America Corporation (BAC)
The second stock we’ll look at is Bank of America. This is one of the major names in the world’s banking industry; it’s market cap of $228 billion and total assets of $3.05 trillion put it in the top 10 largest banks globally, and make it the second largest bank in the US (JPMorgan-Chase is bigger). Bank of America holds approximately 10% of all US bank deposits.
JPM’s analysis of the bank’s current position shows it with an LCR of 120%, a solid figure that bodes well for the bank in the event of a crisis.
Overall, JPM’s Juneja is taking a sanguine view of this stock, noting: “We continue to rate Bank of America Overweight relative to our universe, reflecting the benefit from its strong retail franchise, greater sensitivity to long- and short-term rates, and relatively lower credit risk.”
Juneja’s Overweight (i.e. Buy) rating on BAC shares comes along with a $38.50 price target, to suggest a 12-month upside for the stock of 35%. (To watch Juneja’s track record, click here)
Overall, this major bank has attracted the notice of 15 Wall Street analysts recently and their reviews break down to 6 Buys, 7 Holds, and 2 Sells – for a Moderate Buy consensus rating. BAC shares are selling for $28.51 and their average price target, standing at $39.68, indicates potential for a 39% gain over the course of this year. (See BAC stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
Source: finance.yahoo.com