Fed Governor Adriana Kugler to resign
On Friday, Truist Securities provided insights into the current state of U.S. bank stocks amid growing macroeconomic concerns. Analyst John McDonald highlighted that valuations are reflecting approximately a 45% chance of a recession within the next year. This estimation marks an increase from the 35% probability noted in their previous "Dark & Stormy" analysis. As the first quarter earnings season approaches, with bank earnings starting next Friday, McDonald anticipates that initial earnings projections will be met. However, he expects deeper cuts to earnings per share (EPS) predictions as analysts adjust for factors such as lower interest rates, slower growth, and increased provisions.
Despite the looming risk of recession, Truist Securities does not foresee sell-side EPS estimates fully factoring in a recession scenario at this point. The debate over recession likelihood is expected to continue, affecting bank stock valuation multiples rather than estimate revisions. McDonald expressed the challenges in constructing a bullish case for bank stocks given the economic backdrop and the traditional reliance of bank stock performance on economic conditions. Nevertheless, he pointed out that banks are not directly affected by tariffs, but rather by secondary effects on loan growth, the yield curve, business confidence, and credit quality.
Truist Securities has made slight adjustments to their models and price targets to reflect industry trends up to March 31 and insights from management at March conferences. These updates led to minor reductions in the 2025 EPS estimates, considering a flatter yield curve and a tepid start to "animal spirits" activities such as mergers and acquisitions and loan growth. The recent tariff announcements have prompted further evaluation of recession risks and the potential for additional downward revisions to EPS forecasts during the first quarter results season.
The analysis by Truist Securities continues to favor certain banks that exhibit a combination of positive cyclical levers, organic growth prospects, and self-help opportunities. Among the banks that Truist recommends are Wells Fargo (NYSE:WFC), Bank of America (NYSE:BAC), Fifth Third Bancorp (NASDAQ:FITB), Huntington Bancshares (NASDAQ:HBAN), and Ally Financial (NYSE:ALLY), all of which maintain a Buy rating. According to InvestingPro data, Ally Financial, currently trading at $33 with a market cap of $10.14 billion, appears undervalued based on its Fair Value analysis. The bank offers a compelling dividend yield of 3.64% and trades below book value with a P/B ratio of 0.88. Want deeper insights? InvestingPro subscribers get access to over 30 additional financial metrics and exclusive analysis for ALLY, including detailed Fair Value calculations and comprehensive financial health scores. As the earnings season unfolds, Truist Securities will monitor the impact of macro risks, including how banks might adjust their loan loss reserves in response to various economic scenarios. For Ally Financial specifically, InvestingPro data shows that 8 analysts have recently revised their earnings estimates downward for the upcoming period, with the next earnings announcement scheduled for April 17, 2025. Discover the full potential of your investment decisions with InvestingPro’s comprehensive research reports, available for over 1,400 US stocks. These reports transform complex financial data into actionable intelligence, helping you make more informed investment choices in this challenging market environment.
In other recent news, Ally Financial reported its fourth-quarter 2024 earnings, surpassing analyst expectations with an earnings per share (EPS) of $0.78 compared to the forecast of $0.58. The company’s revenue for the quarter reached $2.1 billion, exceeding the anticipated $2.01 billion. Following the earnings announcement, BofA Securities raised Ally Financial’s stock target to $42 from $38, maintaining a Buy rating, citing improved credit conditions and the potential for future capital deployment. Meanwhile, Citi analysts initiated a 90-day Positive Catalyst Watch on Ally Financial, expecting strong origination yields and stable auto losses.
Ally Financial’s recent strategic moves include the sale of its credit card business and the cessation of new mortgage loan originations, aligning with its focus on core operations like Dealer Financial Services and Corporate Finance. The company projects a net interest margin of 3.4% to 3.5% for 2025, with retail auto net charge-offs expected to range between 2% and 2.25%. Analysts from Citi and BofA Securities highlight the potential for earnings revisions and a focus on achieving mid-teens return on tangible common equity by 2026. These developments reflect a strategic shift towards streamlining operations and enhancing financial performance.
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