3 Bank Stocks to Consider as Cyclical Plays

Bank stocks are excellent options whenever global interest rates edge higher. Most central banks are raising interest rates to curb inflation, which could, in turn, provide strength to the debt market, subsequently giving rise to banks’ interest-generating activities.

Furthermore, banks could benefit from stagnating input costs, which could improve their general operating margins.

Having studied the current market climate, I found three “best-in-class” bank stocks that I’m bullish on.

Goldman Sachs

Goldman Sachs (GS) provides a wide range of offerings in the banking industry, which smooths its top-line earnings. The bank’s strength in its Global Markets segment has been its driving force lately, with the division’s quarterly revenue growing by 98%.

Furthermore, Goldman has exhibited strong growth in its Consumer & Wealth Management segment, with revenue rising by 21% year-over-year. Goldman’s interest-bearing profits will inevitably proliferate amid rising interest rates, which could repair the firm’s credit losses after it cut its Russian lending exposure by 60% earlier this year.

From a quantitative vantage point, Goldman stock produces high-quality return metrics. The stock’s return on equity of 11.19% intertwines skillfully with its 28% diluted earnings per share ratio to suggest that GS stock is a good value stock.

Additionally, the stock’s undervalued on a normalized basis, with its price-earnings and price-book ratios trading at discounts worth 50.27% and 13.87%, respectively.

Goldman stock is also a sustainable income-generating play. The stock’s forward dividend yield of 2.56% is both attractive and sustainable.

According to the TipRanks dividend yield tracker, Goldman’s yield capacity ranges between 1.97% to 2.62%, indicating that the company’s dividend policy is in-line with its shareholders’ interests.

Turning to Wall Street, Goldman Sachs has a Moderate Buy consensus rating, based on seven Buys and five Holds assigned in the past three months.

The average GS stock price target of $419.42 implies 35.8% upside potential.

Citigroup

Citigroup’s (C) restructuring under CEO Jane Fraser hasn’t appealed to investors as the stock’s drawn down by more than 30% during the past year. However, the firm’s service-related activities have picked up lately, suggesting that Citi’s long-term vision is starting to align.

Citigroup’s first-quarter earnings report displayed solid growth, as the company beat its earnings target by 56 cents per share.

Fraser commented: “Given our emphasis on services, I am particularly pleased with our performance in Treasury and Trade Solutions.”

She also added: “Fee growth, trade loans, and cross-border transactions — buoyed by higher rates — led to year over year revenue growth of 18%. Securities Services also performed well, with revenue up 6%. In Markets, our traders navigated the environment quite well, aided by our mix, with strong gains in FX and commodities.”

Furthermore, Citi stock is a deep-value play as the stock’s price-earnings ratio is at an astonishing 41.47% normalized discount. Moreover, Citi’s price-book ratio of 0.56x indicates that the stock’s trading at a 1.78x discount to its fair equity value.

Additionally, Citi stock provides a lucrative forward dividend yield of 3.95%.

An interesting sidenote on Citigroup is that hedge funds are very bullish on its stock. During the past quarter, hedge funds added a cumulative of 10.6 million Citigroup shares. Hedge funds are active traders, meaning that fund flows are helpful indicators for determining a stock’s short-term prospects.

Turning to Wall Street, Citigroup has a Moderate Buy consensus rating, based on eight Buys, eight Holds, and one Sell assigned in the past three months.

The average Citi stock price target of $65.41 implies 31.1% upside potential.

Barclays

With British inflation reaching 1992’s levels at 7%, investors will likely bet that a series of interest rate hikes are in the pipeline. Barclays (BCS) is a “best-in-class” British bank stock at the moment, as it exhibits deep value with a diverse range of financial service offerings.

The bank released its first-quarter earnings report in April, which revealed a 10% year-over-year increase in net income. Furthermore, Barclays produced a return on total equity of 11.5% at an impressive common equity tier ratio of 13.5% (well above the 7.5% requirement).

A central driver behind the firm’s successful quarter was its investment banking revenue, which increased by 10%, which is impressive considering a cooldown in global non-interest-bearing activities.

Rising interest rates will be critical for Barclays moving forward as the bank generates approximately 37.52% of its revenue from debt markets. Higher interest rates could increase the bank’s spreads on loans, and decrease the erosion of its debt outstanding, subsequently leading to higher profitability.

Barclays stock looks appealing from a valuation vantage point. The stock’s forward price-earnings and price-book ratios are trading at normalized discounts worth 53.36% and 6.87%, respectively. In addition, Barclays distributes an attractive dividend at a forward yield of 5.58%.

According to TipRanks’ Crowd Wisdom tracker, Barclays stock has picked up momentum during the past seven days after a prolonged selloff. Additionally, the stock’s still trading at a relative strength index of 41.4, conveying an excellent opportunity to invest in the dip.

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