Largest banks trade at higher multiples than smaller banks now, says KBW's Chris McGratty
Speakers
Chris McGratty -- KBW head of U.S. bank research
— Chopping Block co-host
Summary
- Bank fundamentals are strong entering the quarter, with trading results up 15-20% year-on-year and healthy investment banking.
- Larger banks, such as JP Morgan and Citigroup, are favored due to scale, diversification, and consistency, providing resilience during market volatility.
- A permanent valuation shift has occurred: largest banks now trade at higher multiples than smaller banks, driven by higher and more consistent ROIs.
- PNC Financial Services is fundamentally strong with high teens return on tangible common equity and excess capital, but rated market perform due to valuation risk-reward.
- New York Community Bancorp (now Flagstar) is viewed constructively after past stress; expected to return to profitability with credit improving and a potential buyback at 80% of tangible book value mid-year.
- Private credit will be a major topic on earnings calls, with banks highlighting growth and low-risk assets, though some prominent cases have risk.
- Banks may build reserves due to macro uncertainty, but diversification in large banks offsets this risk.
- The triple crown theme (scale, diversification, consistency) supports investment in largest banks over smaller regionals.
- Investment banking deal timing is debated based on macro conditions, but overall the quarter is expected to be pretty strong.
Trade Ideas
Speaker stated he has liked JP Morgan for a long time, Citigroup is looking decent, and bigger banks are the place to be due to scale, diversification, and consistency. Larger banks possess the triple crown of scale, diversification, and consistency, allowing them to offset weaknesses in one business area with others, leading to strong and resilient ROIs. These banks are expected to perform well and are favored for investment due to their resilience and the permanence of higher valuations. Macro uncertainty could lead to reserve builds or impact investment banking, though diversification mitigates this.
Speaker said they have recently gotten very constructive on New York Community Bancorp (now Flagstar), believing it is past the heavy lift, returning to profitability, credit is improving, and a buyback at 80% of tangible book is expected mid-year. After stress and capital raising, the company is improving credit and profitability, with a potential buyback providing significant value accretion. The stock is attractive due to the turnaround and upcoming catalysts like the buyback. Credit issues could reemerge, or the buyback might not materialize as expected.
Speaker said PNC is a tremendous company with high teens return on tangible common equity, excess capital, and growth, but they are market perform due to valuation risk-reward. While fundamentally strong, the current valuation doesn't offer compelling risk-reward, making it selective for investors. Neutral stance because the company is good but not attractive enough at current levels for outperformance. Valuation could deteriorate further or fail to improve, limiting upside.
