Goldman Sachs Bullish On Regional Banks, Upgrades Fifth Third Bancorp

Bank stocks are off to a hot start to 2021, and one U.S. regional bank — Fifth Third Bancorp FITB  — got a big Wall Street upgrade on Thursday.

The Fifth Third Analyst: Goldman Sachs analyst Ryan Nash upgraded Fifth Third Bancorp from Neutral to Buy and raised the price target from $29 to $35.

Related Link: Barclays Is Bullish On Bank Stocks, Upgrades Goldman Sachs, Morgan Stanley

The Fifth Third Takeaways: Nash named three reasons why he expects Fifth Third, which is headquartered in Cincinnati, Ohio, to outperform in 2021:

• First, he said cost-cutting initiatives will generate positive operating leverage by the second half of 2021.

• Second, Fifth Third has higher reserve levels than its peers despite having similar expected loss levels. Therefore, Fifth Third could have larger reserve releases on the way.

• Finally, Fifth Third’s capital levels exceed its target levels by about 5%, which gives it more balance sheet flexibility.

Goldman is projecting that Fifth Third should generate a 13% Return on Average Tangible Common Shareholders' Equity compared to its peer average of 11.3%.

Nash said that type of execution should give Fifth Third somewhat of a premium valuation to its peers based on price-to-tangible book value.

Yet the stock now trades at a slight discount to peers.

The stock is still being punished for its underperformance during the 2008 financial crisis and its slower progress in reforming its legacy business in the years that followe, Nash said. Yet the bank’s resiliency in 2021 could go a long way in rebuilding investor confidence.

“We view this as an emerging operating leverage story trading at a discount to fundamental value,” he said. 

FITB Price Action: Fifth Third shares were trading 4.1% higher to $31.50 at last check Thursday. 

Benzinga’s Take: Banks will continue to deal with zero interest rates weighing on net interest margins in 2021 and beyond. Yet bank balance sheets will be far more healthy in 2021 than they were back in 2010 during the recovery from the last economic crisis.