Bank investors have been whipsawed this year as surging interest rates and the looming risk of a recession push and pull shares of the biggest U.S. lenders. Bank of America analysts led by Ebrahim Poonawala see lots of potential dangers to bank shares, even with the 24-stock KBW Bank Index already down 18% so far this year. The analysts say that earnings for the group could get hit by slower loan growth, narrower spreads between 2- and 10-year Treasury notes, and rising loan defaults, according to a note published Tuesday. Over the next few months, banks may show the impact from “inflation-driven demand destruction” among the U.S. customers that have previously held up well , they said. “The extent of each remains unknown and explains investor hesitance in assigning higher valuation to stocks,” Ebrahim wrote. “Our consensus forecasts assume normalization in credit costs with our expectations for provisions to average loans” rising by 36 basis points next year. One basis point equals 1/100 th of 1%. While it is possible that some stocks in Bank of America’s coverage may have bottomed out under a mild recession scenario, the risk of a deeper downturn will probably continue to weigh on the group, Ebrahim wrote. “The late-cycle investor mindset will be hard to dispel and is likely to weigh on valuation multiples,” the analyst wrote. “A deeper recession and/or stickier inflation remain the key risks.” Given that uncertain reality, the Bank of America team highlighted banks with a combination of factors: the ability to improve results via internal efforts, “idiosyncratic catalysts” and those with good management execution. Here are four of their top picks: The Bank of America analysts favor Goldman Sachs , even with a conservative valuation multiple versus peers caused by “slowing capital markets activity.” They have a $380 price objective on the New York-based investment bank, which incorporates the risk of recession, according to Ebrahim. Citigroup is another firm with below-average returns, but potential upside can be had if the bank can continue to flaunt better-than-expected credit costs and gain market share in institutional businesses, as it did in the second quarter . The analysts have a $58 price objective on the bank. The analysts also like New York Community Bancorp , citing possible gains from “better than expected balance sheet growth.” They have an $11 price objective on the regional bank. Western Alliance Bancorp , a Phoenix, Arizona-based regional bank, has benefited from an above-average growth outlook and sensitivity to rising interest rates, both factors that will help results if the bank can maintain its loan growth, the analysts wrote. They have a $90 price objective on the bank. — CNBC’s Michael Bloom contributed to this report.
