Chart o’ the Day: The Case for Big Bank Stocks

Wells Fargo this morning, upgrading the entire large cap bank sector after an already large relative outperformance streak in 2016:

We see up to 26% EPS upside potential for the banks in 2018 – driving double- digit P/E discounts to historical levels. Our multi-factor analysis of potential benefits from the incoming GOP legislative priorities suggest the potential for 26% EPS improvement vs. our current 2018E EPS estimates. On a probability-weighted basis, potential EPS upside is 12%. Lower corporate tax rates drive the majority (60%) of EPS upside. We estimate the prospective positive EPS revisions leave pro-forma 2018 P/E multiples at 11.5x and 10.1x, respectively, 10% and 20% below the group’s 25 year average P/E of 12.7x.

There’s a lot of wishful thinking baked in here in terms of the President’s policy ideas. But the valuation idea is real enough.

Here’s what that looks like:

Source:

Upgrading Large-Cap U.S. Banks To Overweight From Market Weight
Wells Fargo – January 9th 2017