US Banking Sector Looking More Robust

Posted on | May 18, 2009 |

US equity markets were trading higher today after encouraging results from Lowe’s Companies enticed investors back to the market. Upbeat research notes on Bank of America and Citigroup also helped lift morale.

Lowe’s Companies, the largest US home improvement retailer, today reported a better-than expected first-quarter profit of 32 cents per share. Although this was 22% lower than the figure reported during the previous comparative period a year ago, it was around 28% higher than consensus expectations of 25 cents a share. [1] The company attributed its stronger bottom line results to aggressive cost cutting.

First-quarter sales, which fell 1.5% to $11.8 billion in the first quarter, were also encouraging, especially given the economic backdrop. Shares in Lowe’s Companies surged 6.5% to $19.64 by around 3.15pm (London time) today.

Also boding well for equity market sentiment was an upgrade for Bank of America’s shares. Goldman Sachs added Bank of America to its ‘conviction buy’ list, citing progress on raising capital and another ’solid’ quarter for the mortgage and capital markets businesses. In the meantime, Goldman Sachs benefitted from a revised price target from Citigroup, which upped Goldman’s share-price estimate by 10% to $160. [2]

Shares in Bank of America jumped 10.6% to $11.80, while Goldman Sachs added 4% to $139.8 a share this afternoon – this means there could be an upside of 14.4% from the current price if Citigroup’s share price target of $160 a share materialises.

Citigroup, meanwhile, advanced 5.2% to $3.66, Wells Fargo gained 4.5% to $25.99 and JPMorgan Chase rose almost 2% to $35.60.

Elsewhere in the financial sector, insurer AIG climbed 5.8% to $1.82 after announcing that it is to speed up plans to take American International Assurance Co Ltd (AIA), its Asian subsidiary, to market via an IPO (initial public offering, which is when a company floats its shares on a stock market for the first time). This development could help AIG raise more than $4 billion.

The proceeds from the IPO are expected to help the insurer repay some of the $180 billion in government aid.

Goldman Sachs, consequently, upgraded Bank of America from ‘neutral’ to ‘buy’ today, saying that the lender may earn 25 cents a share during the second quarter, substantially beating Bloomberg’s average estimate of 2.5 cents. On the other hand, Fitch Ratings downgraded Bank of America’s preferred stock issues. [3]

State Street, the world’s third-largest custody bank, also made the headlines today. The company announced plans to sell stock and debt in order to repay government aid and reported a $3.7 billion writedown. The company also said it expects to report full-year operating profits that would trail consensus expectations; operating earnings are forecast to come in between $4.25 and $4.50 a share this year. State Street shares were up by 7% to $41.23.

By 3.40pm (London time) the Dow Jones Industrial Average had gained 129.75 points (+1.57%) to 8398.39, while the broader S&P 500 was 12.37 points (+1.4%) above its previous close at 895.25.

[1] Source: Consensus estimate sourced from CNN Money (18 May 2009)
[2] Source: Bloomberg News (18 May 2009)
[3] Source: Bloomberg News (18 May 2009)

By Anthony Grech, Research Analyst, IG Index.

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