Many investors agree that normalized EPS will eventually matter, but they are not sure when the market will start to focus on it. We do not expect the market to begin discounting normalized EPS until negative revision risk is in the rear view, at which point we expect material upside in the consumer finance stocks.
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We are launching coverage of Mid-Cap Regional Banks at Market Underweight (MU) and Consumer Finance at Market Overweight (MO). Within Consumer Finance, we are Outperform on AXP, COF, DFS, SYF, and ALLY based on our view that they will benefit from declining credit headwinds and greater top-line torque on their paths to normalized earnings in 2022. Our cautiousness on Regional Banks is based on their anemic topline growth outlooks under ZIRP, but we do see attractive relative value pairing opportunities within the group and initiate at Underperform on CFG, CMA, CFR, KEY, PNC, ZION; Outperform on FITB, FRC, HBAN, MTB, RF, SIVB, TFC, USB; and Peer Perform on PB.
CFG has made great strides since gaining independence from RBS, but its ROTCE continues to lag peers and we see it as unlikely to outperform under ZIRP. We expect top-line growth to remain challenged, even as credit headwinds abate and CFG seeks further expense base optimization, with ROTCE remaining in the sub-10% range.
CFR’s top-line growth will be challenged under zero interest rate policy (ZIRP) and its “EPS growth torque” will be limited, even as credit headwinds abate and the company seeks to further optimize its expense base, with ROTCE remaining in the sub-10% range.
CMA’s high degree of asset sensitivity limits its “EPS growth torque” under ZIRP, challenging its top-line growth; even as credit headwinds abate, ROTCE is unlikely to exceed the 9% range without the benefit of higher rates.
Quality super regional, which has evolved into a lower risk and higher ROTCE bank in the years following the GFC (Global Financial Crisis), is poised for a sharper inflection in 2022 EPS versus peers against a ZIRP backdrop and challenging growth outlook for the industry.
FRC is a founder-led high growth regional bank that offers gearing to affluent households. With a market share of less than 5% of the high net worth addressable market in its footprint, we believe FRC has a long runway for future growth, making it a standout in an industry that faces a rather lackluster growth outlook.
Quality super regional with a strong Midwestern U.S. footprint will experience a sharper inflection in normalized 2022 EPS and ROTCE relative to peers as we emerge from recession, despite ZIRP.
KEY’s top-line growth will remain challenged under zero interest rate policy (ZIRP), resulting in a muted ROTCE inflection as we approach normalized earnings in 2022—even as credit headwinds abate and the company seeks to further optimize its expense base.
While its outperformance is often understated in good times, MTB is built to shine during periods of adversity. Despite ZIRP, we expect an inflection in normalized 2022 EPS and ROTCE on a combination of low-single digit revenue growth, above average operating efficiency, top-of-the-class credit performance, and capital return.
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