Shares if Citigroup Inc. rose Thursday, to buck the broad weakness in the sector, after Keefe, Bruyette & Woods analyst Brian Kleinhanzl turned bullish on the bank, saying valuations are now “attractive” after the recent underperformance relative to its peers.
Meanwhile, Kleinhanzl downgraded J.P. Morgan Chase & Co. /zigman2/quotes/205971034/composite JPM -2.65% , also for valuation reasons, as the stock’s recent outperformance leaves little room for further gains.
Citigroup’s stock /zigman2/quotes/207741460/composite C -2.27% rose 1.5% in afternoon trading, which puts it on track to close at an 11-week high. The gains come as the SPDR Financial Select Sector exchange-traded fund /zigman2/quotes/209660484/composite XLF -1.91% fell 0.4%, with 52 of 65 equity components trading lower, and as the S&P 500 index /zigman2/quotes/210599714/realtime SPX -0.48% slipped less than 0.1%.
Kleinhanzl raised his rating on Citigroup to outperform, after being at market perform since March 31, while raising his stock price target to $65 from $47.
“Shares have lagged peers year to date…but we believe that the company will see improving returns on lower provisions in 2021 and 2022,” Kleinhanzl wrote in a note to clients. “Other banks and consumer finance stocks have rallied from the bottom on credit recovery hopes, shares of Citigroup have lagged, and we expect shares to rebound and provide meaningful outperformance relative to peers over the next 12 months.”
Citi’s stock has rallied 3.0% over the past three months but has tumbled 35.2% year to date. In comparison, the financial ETF has rallied 10.7% the past three months and lost 11.6% this year.
For J.P. Morgan Chase /zigman2/quotes/205971034/composite JPM -2.65% , Kleinhanzl cut his rating back to market perform, after raising it to outperform on March 31, but he lifted his stock price target to $130 from $125.
He said he expects the bank to benefit from an eventual credit recovery and from rising interest rates, but he doesn’t expect short-term rates to rise until after 2022. And he believes upside to improving earnings and higher returns are already partially priced into the stock.
“We continue to believe [J.P. Morgan Chase] has a best-in-class management team and the company will generate more stable returns than peers over the cycle, but we cannot ignore valuation at the same time,” Kleinhanzl wrote. “As we look over the next 12 months, we do not see catalysts that will move shares materially higher versus peers, and we would look to get more constructive on shares if valuations become or attractive or unique earnings drivers emerge (M&A, change in capital requirements, etc.).”
The stock slipped 0.5% in afternoon trading. It has climbed 16.4% over the past three months to outperform the financial sector, and has shed 17.7% this year.
The upgrade of Citigroup and downgrade of J.P. Morgan Chase were part of change in the outlook for the economy, which includes expectations of modestly higher long-term rates and a lower unemployment rate through 2022. Kleinhanzl also expects news of a potential COVID-19 vaccine will lead to a gradual economic recovery in 2021, and he expects banks to resume share repurchases next year.
In addition to the above ratings moves, Kleinhanzl upgraded State Street Corp. /zigman2/quotes/209758976/composite STT -2.01% to outperform from market perform and downgraded Bank of New York Mellon Corp. /zigman2/quotes/200171276/composite BK -2.90% to market perform from outperform.
“For the group, we remain at market weight, as we believe that investors need to add bank stock exposure selectively still and there could be regulatory and fundamental headwinds on the horizon that may impact universal banks more than other bank groups as a new administration updates the regulatory agenda for financials,” Kleinhanzl wrote.