With The 'Easy Trade' In Financials Now Over, BMO Sees 4 Cheap Bank Stocks With Catalysts

With the Financial Select Sector SPDR Fund XLF down about 2.6 percent year-to-date, the perfect storm of rising interest rates, a booming economy and banking deregulation hasn’t delivered the bank stock returns for which many investors hoped.

After some strong returns in previous quarters, one analyst said the easy part of the banking trade is over, but there are still bargains remaining for selective buyers.

The Analyst

BMO Capital Markets analyst James Fotheringham on May 28 reiterated Buy ratings on the following bank stocks:

• Capital One Financial Corp. COF, $126 price target.
• Santander Consumer USA Holdings Inc SC, $23 price target.
• OneMain Holdings Inc OMF, $41 price target.
• Synchrony Financial SYF, $51 price target.

The Thesis

Investors need to focus on cheap bank stocks with clear catalysts, the BMO analyst said. 

“The key drivers of last year's re-rating of U.S. bank stocks (e.g., improving economy, higher rates, benign credit and regulatory relief) are now well-known; the ‘easy trade’ is behind us,” he said in a note.

Three of the four stocks mentioned above have a bullish catalyst in the near-term, Fotheringham said: Santander’s parent company is buying shares of the stock, OneMain will experience funding and capital synergies with ATH and Synchrony has a Walmart Inc WMT contract renewal ahead.

In general, Fotheringham said credit quality continues to improve in the U.S. financial system, and investors seem too concerned about risk when it comes to identifying the remaining value among bank stocks.

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