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Wednesday, February 5, 2025

Bank Earnings Season: Which Two Stocks Are Poised to Soar?

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Wall Street Bullish on Big Banks Ahead of Q4 Earnings

The fourth-quarter earnings season kicks off this week with major banks reporting their financial results, offering investors a crucial glimpse into the overall economic health. These reports are closely scrutinized as banks are uniquely positioned to reflect consumer spending habits, credit market dynamics, and overall economic sentiment. Analysts are particularly interested in assessing the impact of rising interest rates on net interest income and the outlook for investment banking activities. This year, some banks are expected to significantly outperform others, fueled by specific strategic initiatives and the recovery in capital markets. Wall Street’s early sentiment suggests a promising outlook for select institutions that have positioned themselves to thrive amidst current economic circumstances.

Key Takeaways:

  • Citigroup is a top pick among analysts, projected to see substantial growth driven by successful strategic changes and a rebound in capital markets.
  • US Bancorp, a regional bank, is considered undervalued and poised for a significant comeback, offering investors a compelling value proposition.
  • Rising interest rates are expected to boost net interest income for many banks, a key indicator of profitability.
  • Investment banking revenues are anticipated to recover, contributing positively to financial performance.
  • Share buybacks are expected to increase, signifying positive future outlook and potential return to shareholders.

Citigroup: Entering a “New Era”

Citigroup, led by CEO Jane Fraser, is generating considerable buzz on Wall Street. Analyst Mike Mayo of Wells Fargo, who named Citigroup his top pick, believes the bank is entering a “**new era**,” highlighting the positive impact of Fraser’s four-year transformation strategy. **Mayo predicts Citigroup shares could double in the next three years**, as investors fully grasp the successful strategic changes implemented under Fraser’s leadership. In a CNBC interview, Mayo stated that “**the curtain’s just rising on Citigroup changes**,” suggesting that the positive effects of these changes are only beginning to be reflected in their financial performance. This optimistic outlook is underscored by the significant share price surge of nearly 37% in 2024, outperforming both the S&P 500 and the SPDR S&P Bank ETF (KBE).

Capital Market Rebound and Growth Projections

Morgan Stanley analyst Betsy Graseck shares Mayo’s enthusiasm, also naming Citigroup her top pick. Graseck sees the stock as a strong investment opportunity playing on the anticipated capital market recovery. Her analysis points to a projected 37% year-over-year growth in investment banking revenues, exceeding the bank’s own internal forecasts. Graseck expects this growth, along with increased net interest income and service fees, to drive fourth-quarter earnings per share to $1.24, slightly exceeding Wall Street’s consensus estimate. A further sign of confidence is the anticipation that Citigroup will accelerate its share buyback program in 2025, demonstrating management’s belief in the company’s future growth prospects. The consensus among LSEG-polled analysts indicates a “**buy**” rating, with a price target suggesting a potential 20% rally over the next 12 months.

US Bancorp: A Regional Bank Poised for a Comeback

While attention is understandably focused on the largest financial institutions, Wall Street is also showing strong interest in regional banks. US Bancorp, based in Minneapolis, reports its earnings on Thursday. Analysts are optimistic about this bank’s prospects, with Morgan Stanley’s Graseck labeling it a “most preferred” name. Furthermore, Piper Sandler analyst R. Scott Siefers upgraded US Bancorp to “overweight” from “neutral,” suggesting he believes the stock is significantly undervalued relative to its earnings potential.

Inflection Point and Value Proposition

Siefers describes US Bancorp as reaching an “**inflection point**,” highlighting the bank’s potential to deliver consistent positive operating leverage. Although US Bancorp underperformed the S&P 500 and the SPDR bank ETF in 2024, rising only 10.5% (excluding its current dividend of 4.2%), it represents a significant improvement from a 1% decline in 2023 (the year of the regional banking crisis) and a 22% loss in 2022 when the Federal Reserve actively tightened credit. Siefers believes that this bank’s improved standing, combined with its positive operating leverage, will allow the institution to increase shareholder value significantly in 2025. According to Siefers, the institution is now “**a value name positioned to get some swagger back**” during this earnings season. The positive sentiment is echoed by the average analyst rating from LSEG’s survey, showing a “**buy**” rating and a consensus price target suggesting nearly a 20% jump in share price within the next year.

The Broader Economic Outlook

The performance of these banks provides valuable insights into the overall economic climate. As Michael Landsberg, chief investment officer of Landsberg Bennett Private Wealth Management, points out, “**Bank earnings are always an effective way to get a pulse on the economy and the consumer, especially as it relates to credit usage and repayment.**” The strong performance predicted for Citigroup and US Bancorp, coupled with the anticipated increase in net interest income across the sector, can prove to be positive indications about overall economic health and consumer confidence. The robust growth projections also signal a recovery in investment banking, suggesting a more positive outlook for the financial markets in general.

Impact on Consumer-Oriented Companies

Landsberg further emphasized the important correlation between bank performance and consumer-oriented businesses, stating that “**If credit card usage is up, that typically bodes well for companies that sell directly to consumers.**” Therefore, the upcoming bank earnings reports will not only provide valuable information about the financial sector but also act as forward-looking indicators for a wide range of companies reporting later in the earnings season. Monitoring the details disclosed in these reports will prove crucial in understanding potential industry-wide trends and adapting investment strategies accordingly.

Conclusion

The upcoming earnings reports from major banks hold significant implications for investors. While the overall economic outlook remains subject to various influences, the positive analyst sentiment surrounding institutions like Citigroup and US Bancorp offers compelling reasons for optimism. The anticipated growth in net interest income, projected recovery in investment banking activities, and potential for increased share buybacks create a promising scenario for select banks. These reports will not only offer insights into the immediate health of the financial sector but also provide important data points regarding broader economic indicators and provide an important key to the overall trajectory towards improved economic conditions.

Article Reference

Sarah Thompson
Sarah Thompson
Sarah Thompson is a seasoned journalist with over a decade of experience in breaking news and current affairs.

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