Seven Large-Cap Bank Stocks to Buy as Inflation Hedges

Paul Dykewicz

Seven large-cap bank stocks to buy as protection against inflation include some well-known  regional financial institutions in the United States.

The seven large-cap bank stocks to buy also possess market values of at least $10 billion but rank below the huge money center banks that operate nationally or internationally and were featured in my previous column about investing in financial institutions. Nonetheless, the seven large-cap bank stocks to buy provide a path for investors to gain exposure to an industry that typically is viewed as a refuge during times of rising prices.

The large-cap bank stocks to buy are gaining interest from investment industry veteran Jim Woods, head of the Successful Investing and Intelligence Report newsletters and the Bullseye Stock Trader and Eagle Eye Opener advisory services. Woods wrote to his Intelligence Report subscribers on Oct. 15 that he expects positive third-quarter 2021 earnings results for bank stocks, along with increased interest rates, bond yields and economic growth.

Seven Large-Cap Bank Stocks to Buy Are in an Industry Outperforming the S&P 500

As a banking industry proxy, the Financial Select Sector SPDR Fund (XLF) easily has outpaced the SPDR S&P 500 ETF (SPY) in 2021, Woods noted. Despite SPY jumping 21.7% year to date, XLF has zoomed 37.1%. That rise seems likely to continue not just due to the fundamental reasons cited but the reality that bank stocks are gaining as the pandemic weakens, he added.

XLF is designed to correspond generally to the price and yield performance, before expenses, of publicly traded banks that compose the Financial Select Sector Index. The fund’s biggest holdings include large-cap bank stocks, plus Warren Buffett-led Berkshire Hathaway Class B (NYSE: BRK.B). The fund currently has 66 holdings, so it designed to safeguard against a heavy concentration in any single stock.

The Successful Investing newsletter that Woods writes follows domestic and international moving averages to provide guidance about when to be in and out of those markets. The Domestic Fund Composite (DFC) is up nearly 5% above its 39-week moving average to stay in “Buy” status, Woods commented. Financial, technology, cyclical and energy stocks all are participating in the recent market rally, Woods wrote to his Successful Investing subscribers.

Paul Dykewicz interviews investment veteran Jim Woods, editor of Successful Investing.

Seven Large-Cap Bank Stocks to Buy Among Those Weighed by Pension Chairman

Bank stocks account for a significant portion of what pension fund chairman Bob Carlson called one of his “favorite value stock” investments. Carlson, who leads the Retirement Watch investment newsletter and serves as chairman of the Board of Trustees of Virginia’s Fairfax County Employees’ Retirement System with more than $4 billion in assets, said the Oakmark fund uses valuation measures to assess companies in various industries. Those industries include financial services where large-cap banks currently offer investors value and profits.

Retirement Watch chief Bob Carlson answers questions from Paul Dykewicz.

Investors Can Choose from Among Seven Large-Cap Bank Stocks to Buy

Financial services account for 33.9% of Oakmark’s holdings and New York-based Citigroup Inc. (NYSE: C) is its fourth-largest position. McLean, Virginia-based Capital One Financial Corp. (NYSE: COF) is the fund’s second-largest holding. Capital One Financial is known primarily for its credit cards and the television commercials about them, but it also a significant mid-Atlantic banking presence from its purchase of a regional bank more than 10 years ago, Carlson said.

When interest rates climb, large-cap banks usually can widen the spreads they earn between what they pay for deposits and what they can collect in higher interest rates from borrowers. However, a problem can arise later if banks retain too many fixed-rate loans that can lose their appeal if interest rates jump.

Bank of America (BofA) wrote a recent research report that forecast deposits that banks have collected from borrowers since the worst of the pandemic likely will be retained. Although the deposit mix-shift is likely to move toward interest bearing deposits, banks clearly have more leeway to lag deposit pricing compared to the 2015-18 rate, the report noted. Deposit balances for the industry grew in the middle part of the last decade after the Fed began tapering its post-financial crisis quantitative easing.

Seven Large-Cap Bank Stocks to Buy Chosen by BofA

While the near-term operating/macroeconomic outlooks will influence how stocks trade in the short run, BofA predicted investors increasingly will focus on what banks can earn in a somewhat higher interest rate climate with normalized credit costs. BofA also raised its large-regional earnings per share (EPS) estimate by 1%.

In addition, the BofA report rolled out 2023 and 2024 EPS estimates for its banking coverage universe. The 2024 outlook is intended to give investors a lens into the earnings power for the group, assuming rising interest rates, normalized credit costs, moderating capital markets and mortgage activity, as well as some rebalancing in balance sheet mix after a “historic influx of deposit liquidity.”

Citizens Financial Group Gains Place Among the Seven Large-Cap Bank Stocks to Buy

Providence, Rhode Island-based Citizens Financial Group (NYSE:CFG) received a $55 price target from BofA, which assumed below-peer multiples given the bank’s above average rate sensitivity and lack of options to offset higher credit costs. Downside risks include slowing economic growth in an adverse credit environment that may lead to interest rate cuts and net income margin (NIM) compression, faster-than-expected deposit repricing and slower-than-expected capital deployment.

Chart courtesy of www.stockcharts.com

Seven Large-Cap Bank Stocks to Buy Include Fifth Third Bank

Fifth Third Bank (NASDAQ:FITB), of Cincinnati, Ohio, earned a $46 price objective from BofA. The bank’s potential risks that might cause it to miss that target include a prolonged low interest rate environment, slower-than guided loan growth on weaker economic activity and worsening credit quality.

BofA opined that upside could be achieved beyond its price objective for Fifth Third Bank from a better-than-expected improvement in the macroeconomic environment, stronger-than-anticipated balance sheet growth and enhanced expense management.

Chart courtesy of www.stockcharts.com

First Republic Bank Slotted in Seven Large-Cap Bank Stocks to Buy

San Francisco-based First Republic Bank (NYSE: FRC) received a $240 price objective from BofA.  The valuation topped the average of its peers due to robust balance sheet growth and a strong credit profile, BofA wrote.

Upside beyond that price target could come from favorable rates, better-than-expected expense management and increased wealth management fees. Risks that could cause slippage below the price target include a longer yield curve that would hurt earnings, increased competition that would slow loan growth and a higher level of provisioning for potential loan losses.

Chart courtesy of www.stockcharts.com

Huntington Bancshares Added to Seven Large-Cap Banks to Buy

Columbus, Ohio-based Huntington Bancshares (NASDAQ: HBAN) gained a $19 price target from BofA, with higher-than-peer average multiples due to its strong outlook for returns. BofA wrote that prudent risk management and strong deal execution should help support the multiples.

Risks to BofA’s price objective include inability to offset regulatory fee income headwinds, lower-than-expected recognition of synergies associated with its planned combination with TCF Financial Corporation (NASDAQ: TCF) and the risk of the TCF deal not completing. The proposed all-stock merger with a total market value of approximately $22 billion would create a top 10 U.S. regional bank with dual headquarters in Detroit, Michigan and Columbus, Ohio.

Chart courtesy of www.stockcharts.com

M&T Bank Wins Spot Among Seven Large-Cap Bank Stocks to Buy

Buffalo, New York-based M&T Bank (NYSE: MTB) received a $180 price objective from BofA, featuring multiples above its peer banks due to superior historical credit performance. Risks to reaching that price target include moderating commercial real estate, runoff from residential mortgage acquired and attrition from rate-sensitive trust deposits. Potential outperformance could come from a better-than-expected economic recovery, BofA noted.

Chart courtesy of www.stockcharts.com

PNC Financial Group Joins Seven Large-Cap Bank Stocks to Buy

Pittsburgh-based PNC Financial Group (NYSE: PNC) earned a $215 price target from BofA. The investment firm offered above-average-peer multiples given the bank’s prospects to offset higher credit costs and potential upside to deal synergies from its BBVA USA acquisition. Risks to the price target include macroeconomic factors such as a lower-for-longer rate environment, the implementation of a strict liquidity coverage ratio, further regulation on overdraft income that restricts bank profitability and risks associated with the closing of its previously announced acquisition of BBVA USA.

Chart courtesy of www.stockcharts.com

Truist Financial Group Lands in Seven Large-Cap Bank Stocks to Buy

BofA’s $74 price target for Truist Financial Group Inc. (NYSE: TFC), a regional bank in Charlotte, North Carolina. The bank gained better multiples than its peers due to its historical credit performance and increased flexibility to manage its balance sheet. Risks to attaining the price objective are macroeconomic and include a double-dip recession, strict liquidity coverage ratio and further regulation on overdraft income that restricts bank profitability. Other risks are enhanced regulatory scrutiny and restrictions on capital distributions, according to BofA.

Chart courtesy of www.stockcharts.com

Healthier COVID-19 Case Numbers Could Aid Seven Large-Cap Bank Stocks to Buy

The highly transmissible Delta variant of COVID-19 seems to be waning as case numbers and deaths dip. Plus, adult population in the United States increasingly is becoming vaccinated. The U.S. Food and Drug Administration (FDA) recently issued emergency use authorization (EUA) for a single booster shot of the Pfizer-BioNTech COVID-19 vaccine for high-risk groups.

A booster shot of the Pfizer-BioNTech vaccine can be given to people aged 65 years and older at least six months after they receive a second dose of that vaccine to guard against COVID-19. The booster also is approved for those aged 18 years and older who have underlying medical conditions and people aged 18 and older who live or work in high-risk settings.

The Centers for Disease Control and Prevention (CDC) reported on Oct. 19 that 219,616,368 people, or 66% of the U.S. population, have received at least one dose of a COVID-19 vaccine. The fully vaccinated total 189,487,793 people, or 57.1%, of the U.S. population, according to the CDC.

COVID-19 cases worldwide totaled 241,549,529 cases and led to 4,912,810 deaths, as of Oct. 19, according to Johns Hopkins University. U.S. COVID-19 cases hit 45,130,987 and caused 728,192 deaths. America has the dreaded distinction as the country with the most COVID-19 cases and deaths.

The seven large-cap bank stocks to buy give investors an opportunity to profit from their strong performance compared to the S&P 500.

Paul Dykewicz, www.pauldykewicz.com, is an accomplished, award-winning journalist who has written for Dow Jones, the Wall Street JournalInvestor’s Business DailyUSA Today, the Journal of Commerce, Seeking Alpha, GuruFocus and other publications and websites. Paul, who can be followed on Twitter @PaulDykewicz, is the editor of  StockInvestor.com and DividendInvestor.com,  a writer for both websites and a columnist. He further is editorial director of Eagle Financial Publications in Washington, D.C., where he edits monthly investment newsletters, time-sensitive trading alerts, free e-letters and other investment reports. Paul previously served as business editor of Baltimore’s Daily Record newspaper. Paul also is the author of an inspirational book, “Holy Smokes! Golden Guidance from Notre Dame’s Championship Chaplain,” with a foreword by former national championship-winning football coach Lou Holtz. The book is great as a gift and is endorsed by Joe Montana, Joe Theismann, Ara Parseghian, “Rocket” Ismail, Reggie Brooks, Dick Vitale and many othersCall 202-677-4457 for special pricing.

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