American Express, Goldman Sachs, Citigroup lead downgrades at BMO as ‘banks and specialty finance stocks look vulnerable’

“Bottom Line: Banks and specialty finance stocks appreciated by almost +40% into year-end (versus S&P 500
SPX
) and now look vulnerable to an impending credit cycle (soft landing or not) and ever-higher capital requirements (from seemingly interminable regulatory pressure),” Worthington said Wednesday.

Credit quality is deteriorating and lenders will likely need to grow
into new capital thresholds as proposed by U.S. banking regulators as part of the Basel III endgame.

Citigroup reports its fourth-quarter results on Friday, and Goldman Sachs weighs in on Tuesday.

Also read: JPMorgan, Bank of America lead earnings parade of U.S. largest banks to cap off tough year

Overall, BMO is bearish on banks and specialty finance stocks, but bullish on aircraft leasing companies.

AerCap Holdings NV
AER,
+1.75%
ranks as BMO’s top buy recommendation and American Express
AXP,
-1.12%
is its least-favored stock, Fotheringham said.

BMO cut its rating on American Express Co. to underperform from market weight.

BMO also cut its ratings on Goldman Sachs
GS,
-0.70%,
Citigroup
C,
-0.89%,
Capital One Financial Corp.
COF,
-2.61%,
Synchrony Financial
SYF,
-0.55%
and Ally Financial Inc.
ALLY,
-0.25%
to market perform from outperform.

Fotheringham zeroed in on the anticipation of an increase in net charge-offs, which is debt owed to a company that’s not expected to be paid back.

“All six stocks are sensitive to rising net charge-off (NCO) rates for credit cards and/or prime auto loans,” he said.

All told, net charge-off rates for credit cards are expected to increase by about 1.85% and by 0.29% on prime auto loans.

Despite the gloom, BMO pointed out some bright spots in the finance world at the moment.

BMO launched overage of aircraft leasing companies AerCap Holdings and Air Lease Corp.
AL,
+1.15%
with outperform ratings.

“Both companies benefit from an air travel industry offering more passengers than seats,” he said. “Airline passenger traffic grew +50% last year, but aircraft manufacturing is down -40% since the pandemic.”

For its part, AerCap has been benefitting from the supply-demand mismatch by selling assets at meaningful book value premiums and using sale proceeds to repurchase its shares below book value, he said.

Affirm Holdings Inc.
AFRM,
+0.78%
and SoFi Technologies
SOFI,
+3.22%
were initiated with market perform ratings as part of BMO’s specialty finance focus.

BMO also launched coverage of Enova International Inc.
ENVA,
-0.32%
and Bread Financial Holdings Inc.
BFH,
-0.32%
with market perform ratings.

Also read: JPMorgan’s stock upgraded, Wells Fargo’s stock downgraded at Deutsche Bank ahead of earnings results