Bank Earnings Are Coming. One Stock Analysts Like—and Another They Say to Sell.

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With bank earnings coming in a few weeks,

Bank of America

is looking like a winner while Wall Street is less optimistic about

Citigroup
.

That said, there are big geopolitical and economic uncertainties for banks now.

Broadly speaking, the outlook for banks should be good. The Federal Reserve is expected to continue hiking interest rates this year, which would allow banks to profit more on the spread between the interest they earn on loans and the interest paid on deposits. But Wall Street has expected an aggressive rate-hiking cycle for months, meaning that any benefits are likely already priced into bank stocks.

What’s concerning analysts and investors alike now is that the Fed will move too quickly on rates and will push the economy into a recession. This comes as the broader market is also interpreting the economic impact of Russia’s invasion of Ukraine. While U.S. banks have very little direct exposure to Russia, their clients may be exposed in the form of higher commodity costs, which could in turn have implications for U.S. banks.

Barron’s has said for months that investors will likely want to take a stock-picking approach to banks this year rather than investing in the whole sector as some banks are better-positioned to navigate the current climate. In a note Monday, analysts at

Morgan Stanley

lowered its view on financial stocks to “In-Line” from “Attractive.” Citigroup (ticker: C) was downgraded to “Underweight” from “Equal Weight” while the Morgan Stanley team felt more bullish on Bank of America (BAC) shares, upgrading the stock to “Equal Weight” from “Underweight.”

Citigroup has been a challenging bank in recent years due in part to what regulators cited as weak internal controls. Over the past year, under the direction of chief executive Jane Fraser, the bank has updated its leadership ranks and has been working to shed non-core businesses while spending to improve efficiencies. But Wall Street was underwhelmed at the bank’s Investor Day earlier this month: The analyst community was generally on board with Citigroup’s vision but expressed concerns over how long it will take for the bank to achieve its goals. 

Citigroup is the only of the big U.S. banks to trade below book value, which could make it an enticing bet for value-oriented investors. But analysts say there are too many variables now for the bank to have an easy time meeting its goals.

“In our view, Citi’s granular revenue targets seem a bit punchy as they are roughly double what we are modeling for peers and reflect a significant improvement from Citi’s historical performance. Not only does Citi need to execute on multiple fronts (wealth management, treasury and trade services, U.S. personal banking), but it also needs to do this in an environment with higher tail risks both domestically and internationally,” Betsy Graseck, analyst at Morgan Stanley, wrote.

She sees Citigroup shares hitting $60 apiece, up 6% from recent trading levels.

Bank of America seems like a better bet in Graseck’s view as it is the bank most sensitive to interest rate changes and it has a healthy loan book.

“BAC’s long-held strategy of responsible growth comes with tighter underwriting standards and strong credit quality, as evidenced by its low loan loss ratios under the severely adverse case in the annual Fed stress test. This limits downside relative to peers in a tougher macro environment with higher tail risk,” Graseck wrote, while noting shares could climb 12% to $49 apiece.

The big banks will start reporting first quarter earnings in mid-April.

Write to Carleton English at [email protected]