BofA Upgrades CME Group, Bank Of NY Mellon On Expectations For Rising Interest Rates

Financials are off to a strong start in 2021, but one analyst said Wednesday the runs for two financial sector stocks may just be getting started.

The Analyst: Bank of America analyst Michael Carrier upgraded Bank of New York Mellon Corp BK from Underperform to Buy and raised his price target from $43 to $50.

Carrier also upgraded CME Group Inc CME from Neutral to Buy and raised his price target from $200 to $220.

The Thesis: In the notes, Carrier said Bank of NY Mellon has improved earnings and revenue growth outlooks and an attractive valuation.

Carrier said the potential for rising interest rates coupled with the bank’s investments in strategic initiatives could drive growth upside in coming years. He estimates a 1% parallel shift in the yield curve could potentially increase the company’s EPS by more than 10%.

“We see an improving growth outlook in the Pershing/RIA market given investments and a shifting industry landscape; treasury, clearing, and collateral management given increasing issuance and shifting rates; asset management given an improving outlook for waivers and the potential for more interest in fixed income given higher yields and the run in equities; and digital currencies, given ongoing investments in that area,” Carrier said.

Related Link: BofA Raises Bank Stock Price Targets, Sees Potential For 'Significant EPS Upside'

When it comes to CME Group, Carrier is expecting revenue growth acceleration starting in the second half of 2021 driven by rising interest rates and inflation. He said CME has exposure to foreign exchange, commodities, and equities, all of which could experience rising volumes in an inflationary environment.

In the longer-term, Carrier said earnings and revenue growth could be “comfortably” in the double-digit percent range and the stock’s dividend yield could rise to the 4% range.

Benzinga’s Take: The decade-long bull market following the 2008 financial crisis was a difficult period for many banks and other financial stocks due to historically low interest rates and a climate of intense regulations. However, many financial stocks are now well capitalized, streamlined and poised for some major earnings growth in the cycle of rising interest rates following the pandemic downturn.