American Express Co., Citigroup Inc., and Goldman Sachs Group Inc. were among six financial firms downgraded by BMO Capital Markets, according to analyst James Fotheringham. Despite a rally in banks and specialty finance stocks since October, the sector is now at risk due to a potential impending credit cycle and increasing capital requirements driven by regulatory pressure.
The credit quality of these firms is deteriorating, necessitating their growth into new capital thresholds proposed by U.S. banking regulators under the Basel III endgame. Citigroup is expected to release its fourth-quarter results on Friday, while Goldman Sachs will announce theirs on Tuesday.
While BMO maintains a bearish outlook on banks and specialty finance stocks, it remains bullish on aircraft leasing companies. AerCap Holdings NV is currently BMO’s top buy recommendation. On the other hand, American Express Co. has been downgraded to underperform from market weight by BMO.
BMO has also lowered its ratings on Goldman Sachs, Citigroup, Capital One Financial Corp., Synchrony Financial, and Ally Financial Inc. from outperform to market perform.
Rising Net Charge-Off Rates: An industry concern
According to Fotheringham, an expert in the field, there is growing concern about the anticipation of an increase in net charge-offs. Net charge-offs refer to the debt owed to a company that is not expected to be repaid. This issue affects six stocks, all of which are sensitive to rising net charge-off (NCO) rates for credit cards and/or prime auto loans. It is projected that net charge-off rates for credit cards will increase by approximately 1.85%, while prime auto loans are expected to experience a 0.29% increase.
The Bright Side in Finance
Despite the somber outlook, BMO (Bank of Montreal) has highlighted some positive developments in the finance sector. They have initiated coverage on two aircraft leasing companies, namely AerCap Holdings and Air Lease Corp. These companies have received outperform ratings due to the favorable conditions in the air travel industry. As the number of passengers continues to exceed available seats, both AerCap and Air Lease Corp are poised for success. Although aircraft manufacturing has decreased by 40% since the pandemic, airline passenger traffic has grown by 50% over the past year.
AerCap, in particular, has been capitalizing on the supply-demand mismatch by selling assets at significant book value premiums. Additionally, they have been using the proceeds from these sales to repurchase their shares below book value, resulting in substantial benefits for shareholders.
Within BMO’s specialty finance focus, Affirm Holdings Inc. and SoFi Technologies have been given market perform ratings. BMO has also initiated coverage on Enova International Inc. and Bread Financial Holdings Inc., both of which have received market perform ratings.
Also read: JPMorgan’s stock upgraded, Wells Fargo’s stock downgraded at Deutsche Bank ahead of earnings results