The 7 Best Financial Stocks to Buy for a Season of Reflation

financial stocks - The 7 Best Financial Stocks to Buy for a Season of Reflation

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American financial stocks have already had a big rally this year in anticipation of the economic reopening and a higher inflation environment. Banks are among the most emblematic cyclical stocks — those that do well when the economy is strong. So far in 2021, the benchmark Dow Jones U.S. Banks Index has risen 32% as Covid-19 vaccinations accelerate and U.S. states ease restrictions. With the  economy expected to fire-up in this year’s second half, we look at the seven best financial stocks to buy for a season of reflation.

Reflation is a monetary policy that seeks to stimulate and expand economic output after a recession. The term “reflation” is often used to describe the first phase of an economic recovery. Right now, the U.S. is in a reflationary period, and that benefits many sectors of the economy, banking among them. Banks will benefit as consumer spending ramps up and inflation pressures lead to higher interest rates that are charged of loans and credit cards.

  • Ally Financial (NYSE:ALLY)
  • Citigroup (NYSE:C)
  • U.S. Bancorp (NYSE:USB)
  • Wells Fargo (NYSE:WFC)
  • Bank of America (NYSE:BAC)
  • PNC Financial (NYSE:PNC)
  • JPMorgan Chase (NYSE:JPM)

Best Financial Stocks: Ally Financial (ALLY)

ally financial office building stocks to buy

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Ally Financial is the little bank that could. The 23rd largest lender in the U.S. based on assets, Detroit-based Ally Financial has seen its stock price rise 53% so far this year to $54.56. And the trend line has been straight up. The lender provides customers with online banking, mortgage loans and dabbles in corporate lending. But its real bread and butter is in car loans. Ally Financial is today one of the biggest car financing and leasing companies in America, with 4.5 million active automotive loans. The bank adds nearly 1.5 million new car loans each year.

And business is brisk at Ally Financial. The pandemic and a shortage of semiconductors and microchips have strained global automotive supply chains, resulting in a limited supply of new cars. This shortage of new cars has led to record high prices. Automotive website Edmunds reports that the average price for a new car is now nearly $40,000, while for used cars it is $23,000. Higher car prices mean consumers need to borrow more to purchase them, which gives a boost to Ally Financial’s loan book.

Deutsche Bank recently initiated coverage on ALLY stock with a “buy” rating and a $65 price target.

Financial Stocks: Citigroup (C)

A Citibank (C) sign hangs on a Citibank office in Hong Kong.

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Citigroup is one of the biggest banks in the U.S. Ranked the fourth largest lender by assets, New York City headquartered Citigroup runs both a major consumer banking division, as well as a leading investment banking segment that generates nearly 65% of its annual revenues. The investment banking side of Citigroup got into hot water with securities regulators at the end of 2020. Authorities accused the lender’s compliance and risk-management practices of being “deficient.” Singling out the way Citigroup treats consumers in insurance matters and handles foreclosed homes, the bank was hit with $400 million in regulatory fines.

Citigroup responded to the hefty fines by announcing that then Chief Executive Officer Michael Corbat would “retire” and be replaced by Jane Fraser in the top leadership role. Fraser’s first act as CEO was to announce that Citigroup would invest $1 billion to improve its compliance and risk management practices. Investors appear to be in a forgiving mood and have pushed C stock 24% higher year-to-date to its current level of $76.68. With the scandal and fines behind it, and interest rates likely to move higher, now is a good time to buy shares of Citigroup.

Financial Stocks: U.S. Bancorp (USB)

usbank (USB) logo on a bank during nighttime

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The fifth-largest U.S. bank, U.S. Bancorp did not sit still during the pandemic. The lender that specializes in traditional banking, wealth management and insurance products spent the past 15 months beefing up its digital and online banking services, and expanding its branch network into the U.S. southeast and Texas. The expansion, coupled with strong earnings, have lifted USB stock, which is up 37% since February 1 at $58.91 a share. Since its March 2020 low when stock markets crashed because of the pandemic, U.S. Bancorp’s stock has nearly doubled.

Strong financial results have helped. While the lender reported a 5% drop in its revenue during the first-quarter of this year, its profitability actually improved. This was due to a drop in provisions for credit losses from $993 million to -$827 million in the first quarter. That change in credit losses bolstered U.S. Bancorp’s first-quarter earning per share (EPS) to $1.45 from $0.72 a year earlier. Analysts see more gains ahead for USB stock, with a median price target of $62 and a high estimate of $69 per share.

Financial Stocks: Wells Fargo (WFC)

A Wells Fargo (WFC) sign hangs on a brick building in Bloomfield, Connecticut.

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Wells Fargo took a hit recently after it was disclosed that Warren Buffett’s Berkshire Hathaway, once the biggest holder of WFC stock, has dumped almost all of its position in the bank. However, the third largest lender in the U.S. weathered the bad publicity and continued to rebuild after a massive fraud scandal that involved fake bank accounts. The New York City based lender has been positioning itself to come out of the pandemic stronger. Chief Executive Officer Charlie Scharf has committed to cut $10 billion from Wells Fargo annual expenses in an effort to create a leaner and more nimble financial institution.

Investors have been responding positively to Wells Fargo turnaround story. Year-to-date, WFC stock is up about 50% to $45.21 a share.  Investors have also liked the recent comments Wells Fargo CEO Charlie Scharf made about the bank’s dividend. After reducing the quarterly dividend payment to just $0.10 per common share (representing a 24% payout ratio) during the pandemic, Scharf now says he and Wells Fargo’s Board of Directors are discussing raising the payout ratio to between 30% and 40%.

Financial Stocks: Bank of America (BAC)

The logo of Bank of America (BAC) in modern office building in Beverly Hills, California

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Speaking of dividends, excitement was generated when Bank of America CEO Brian Moynihan said that he expects to increase dividends and share buybacks this year as the second largest lender in America’s profitability improves. “Our shareholders ought to benefit,” said Moynihan on Fox News. Coming out of the pandemic, Bank of America is looking very strong. The lender beat analyst expectations with its first-quarter earnings, reporting revenues of $22.8 billion and net income of $7.6 billion, a 113% year-over-year increase. Bank of America released $2.7 billion of reserves during the first quarter. Those reserves had been set aside to cover potential loan losses during the Covid-19 health crisis.

Looking ahead, Bank of America is expected to benefit from higher interest rates given its huge portfolio of consumer, commercial and wealth management loans that totals more than $800 billion. The solid results and higher interest rate environment has investors bullish on BAC stock.  So far this year, the lender’s share price has climbed 37% to $41.63. With consumer spending and travel ramping up over the summer, many analysts expect Bank of America shares to continue rallying, with a median price target of $44 and a high estimate of $52.

PNC Financial (PNC)

PNC bank logo on building

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In mid-May, the U.S. Federal Reserve approved PNC Financial’s acquisition of the U.S. operations of Spanish lender BBVA (NYSE:BBVA). The $11.6 billion cash acquisition creates a bank that has nearly $650 billion in assets spread across two dozen U.S. states. Following the deal’s conclusion, Pittsburgh, Pennsylvania-based PNC Financial will become the fifth largest lender in America. In addition to traditional banking services, PNC Financial also offers asset management and estate planning at its more than 2,300 branches.

PNC stock has rallied with the broader banking sector this year and is up 27% year-to-date at $189.12 a share. Retail, corporate and institutional banking accounted for nearly 60% of PNC Financial’s $16.9 billion of revenues in 2020, and that puts the lender in a good position as the economy reopens and Covid-19 case counts drop. While the bank’s stock has run far, many analysts remain believers in its potential to run even further. The high price target on PNC Financial’s stock is currently $232.

JPMorgan Chase (JPM)

Chase Bank logo and storefront

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Last but not least is the largest bank in the U.S., JPMorgan Chase. The multinational New York City based bank has been preparing for the end of the pandemic by hiring several executives away from investment bank Goldman Sachs (NYSE:GS) and Wells Fargo to run a new division that is focused on growth-equity investing and direct lending. The aim of this new division is to give customers of JPMorgan Chase exposure to companies before they go public, something retail investors have been demanding for years.

Responding to customer demands has helped keep JPMorgan atop the banking industry and enabled it to expand. The lender is currently completing the opening of 400 new bank branches and is close to becoming the first U.S. bank to have a brick and mortar branch located in every state except Alaska and Hawaii. The expansion will see JPMorgan Chase hire 3,000 new branch staff this summer. The continued growth and diversification has helped to lift JPM stock 26% year-to-date to $160.29 a share. The median price target on the shares is $171.20, with a high estimate of $200

Disclosure: On the date of publication, Joel Baglole did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

Joel Baglole has been a business journalist for 20 years. He spent five years as a staff reporter at The Wall Street Journal, and has also written for The Washington Post and Toronto Star newspapers, as well as financial websites such as The Motley Fool and Investopedia. 

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