In the wake of recent turbulence within the U.S. banking sector, Citigroup analysts advocate for investors to adopt an aggressive stance toward purchasing bank stocks, citing attractive entry points created by the upheaval. This sentiment comes amidst concerns raised by major players in the industry, such as New York Community Bancorp and Japan’s Aozora Bank, regarding commercial real estate (CRE)-related issues.
Despite the CRE-related worries, Citigroup remains confident in the broader banking sector, emphasizing that the exposure to office loans is relatively minimal for banks under their coverage, ranging from 1% to 4% of the total. Additionally, they highlight that while profits have taken a hit in recent months due to capital buffers being built against potential loan losses tied to CRE, the bulk of reserve build-up is now in the past.
Last week’s unexpected quarterly loss reported by New York Community Bancorp, a significant CRE lender in New York, and subsequent dividend reduction sent uncertainty throughout the industry. This event prompted questions about other lenders’ exposure to CRE, particularly concerning the impact of elevated interest rates and high vacancies resulting from remote working arrangements.
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Citi Analysts POV
In light of these developments, Citi analysts maintain their view that investors should adopt an offensive rather than a defensive strategy. As part of this strategy, they have upgraded their rating on Citizens Financial Group’s stock to “buy” from “neutral,” highlighting the stock’s embedded growth potential. Similarly, they reaffirmed their “buy” rating for M&T Bank, expecting positive commentary from the bank’s management to restore market confidence in its credit exposures.
Looking ahead, while challenges remain within the banking sector, opportunities for growth and recovery abound. By capitalizing on the current market dynamics, investors may position themselves favorably for the future as the industry navigates through uncertainty toward stability and growth.
