Goldman also downgraded M&T Bank to Neutral, while Deutsche upped the stock's rating to Buy
With a more cautious view on the overall bank group, Deutsche Bank analyst Matt O'Connor downgraded Citi (C), Huntington Bancshares (HBAN) and Morgan Stanley (MS) to Hold, while separately upgrading M&T Bank (MTB) to Buy. Meanwhile, his peer at Goldman Sachs took a more bullish view on Citi, adding the stock to the firm's Americas Conviction List. Both Goldman and Wells Fargo cut U.S. Bancorp (USB) to Sell-equivalent ratings on underperformance that is expected ahead.
ANALYSTS DIVERGE ON CITI: In a research note combining his fourth quarter preview and 2020 outlook for the banking sector, Deutsche Bank's O'Connor downgraded Citi to Hold from Buy with an unchanged price target of $81. While Citi has been the best performing bank stock since the bottom in the overall market, the analyst sees more limited upside from here given his more cautious view on the macro backdrop, the company's "continued strategic challenges" in the consumer bank, and less future expense flexibility. Citi has historically traded at a discount and he does not see catalysts to meaningfully narrow this gap in the near or medium term.
More bullish on the stock, Goldman Sachs analyst Richard Ramsden added Citi to his firm's Americas Conviction List, raised his price target for the shares to $88 from $84, and reiterated a Buy rating on the name. The analyst noted that the market is overly pessimistic on Citi's revenue growth inflection, targeted expense savings, and outlook for credit costs, given the improvement in the risk profile of its international loan book. While short term fluctuations in the shares are driven by concerns over trade and the outlook for global GDP growth, Citi's path to higher returns "is clearer than the market currently ascribes value to," the analyst said.
DEUTSCHE AND GOLDMAN ALSO DIVERGE ON M&T: Deutsche Bank's O'Connor also upgraded M&T Bank to Buy from Hold and raised his price target on the shares to $185 from $168 to reflect the stock’s relative valuation and the analyst's view that the bank is "defensive during bank downturns." Moreover, the analyst told investors that he believes the stock's risk/reward profile at current levels is compelling.
Meanwhile, Goldman Sachs analyst Ryan Nash downgraded M&T Bank to Neutral from Buy with a price target of $184, up from $169. Limited earnings growth makes the company's premium valuation harder to justify, Nash contended, adding that he expects M&T's margin pressure to be "outsized" relative to peers in the near-term given its higher starting point and lower deposit beta on the way up. The analyst also thinks the bank's 2020 earnings growth will likely be negligible and growth over the next two years is likely to trail peers.
U.S. BANCORP CUT TO SELL: Meanwhile, Goldman Sachs' Ramsden also downgraded U.S. Bancorp to Sell from Neutral with a $55 price target. The analyst said he expects U.S. Bancorp to experience one of the largest reductions in operating leverage in 2020 due to net interest margin pressure, continued loan yield repricing, a deceleration of fee income and further expense growth. The bank's current valuation, even adjusting for returns, appears expensive, Ramsden contended.
Also bearish on the stock, Wells Fargo analyst Mike Mayo downgraded U.S. Bancorp to Underweight from Equal Weight with a $61 price target, given his view that the stock will underperform the banking industry over the next 12 months, consistent with his firm's new rating system. Strategically, U.S. Bancorp frittered away a degree of its competitive advantage by not capitalizing more when its competitors were weaker, he contended. Financially, the analyst argued that its premium ROE and efficiency should narrow by another 100bp on top of the 300bp narrowing of the past five years. The company's newer moves to expand nationally also come later than peer and with new risks and at a time when they have not shown the benefits of harvesting tech benefits to the level of its larger peers or with the clarity of peers such as PNC (PNC), Mayo added.
ON THE SIDELINES: Additionally, Deutsche Bank's O'Connor downgraded Morgan Stanley and Huntington Bancshares to Hold from Buy, with $51 and $15 price targets, respectively. The analyst told investors that his Morgan Stanley downgrade reflects his more cautious macro outlook and his view that further market share gains in many of the bank's businesses will be tougher. Further, Morgan Stanley's margin expansion in wealth may not continue and its cost savings will also prove more challenging, O'Connor added. Regarding Huntington Bancshares the analyst also cited a lack of potential catalysts and potentially more underlying expense pressure/fewer cost levers to pull than at other regionals.
OTHER NOTABLE RATING CHANGES: Barclays analyst Jason Goldberg upgraded Bank of America (BAC) to Overweight from Equal Weight with a $43 price target, while downgrading Wells Fargo (WFC) to Equal Weight from Overweight with a $59 price target. Meanwhile, Wolfe Research cut JPMorgan's (JPM) rating to Peer Perform from Outperform.
PRICE ACTION: In afternoon trading, shares of Citi have slipped almost 1% to $79.24, while U.S. Bancorp's stock has dropped about 2% to $57.52. Also lower are shares of Bank of America, M&T Bank, Huntington Bancshares, Morgan Stanley, Wells Fargo and JPMorgan.