Analyst Cautions Vulnerability In Finance Stocks, Downgrades Ally Financial And Goldman Sachs But Optimistic On Aircraft Lessors

BMO Capital Markets analyst James Fotheringham initiated coverage on a few aircraft lessors, investment bank, and disruptive tech lenders stocks and lowered ratings on auto lenders companies based on its Non-Performing Asset Formation Analysis.

The analyst writes that banks and specialty finance shares appreciated by almost +40% into year-end (vs. SPX +13%) and now look vulnerable to an impending credit cycle and significantly higher capital requirements.

System-wide credit is deteriorating, and lenders will likely need to grow into new capital thresholds, says the analyst.

The analyst downgraded auto lender Ally Financial Inc ALLY and investment bank The Goldman Sachs Group Inc GS to Market Perform from Outperform with a price target of $36 and $357, respectively.

The analyst lowered these consumer credit stocks that are sensitive to rising net charge-off rates for credit card (+185 bps) and/or prime auto (+29 bps) loans.

ALLY: The analyst sees ALLY's earnings as highly sensitive to the net interest margin benefits from lower interest rates; however, he sees slowing loan growth and rising credit costs as headwinds. 

The analyst forecasts that the Fed funds rate will fall to around 5% by the end of next year, with rate cuts starting in H2 FY24, and expects rates to fall further in 2025, with Fed funds reaching around 3.5% by the end FY25.

Fotheringham estimates core EPS of $3.51 in FY24 and $5.48 in FY25.

GS: Going forward, the analyst expects GS's increasing pro forma exposure to potentially volatile global banking & markets revenues and pressures on its highly coveted corporate culture from shrinking revenue pools in some of its key businesses as a matter of concern. 

The analyst estimates core EPS of $33.97 in FY24 and $39.14 in FY25.

At an Outperform rating, Fotheringham initiated coverage on aircraft lessors AerCap Holdings NV AER and Air Lease Corp AL at a price target of $103 and $54, respectively.

Fotheringham is bullish that these companies will benefit from an air travel industry offering more passengers than seats. 

Given that aircraft manufacturing has been down 40% since the pandemic, AER is capitalizing on this supply/demand mismatch by selling assets at meaningful book value premiums and using sale proceeds to repurchase its own shares below book value, writes the analyst.

AER: The analyst believes supportive market dynamics offer the company a favorable position when negotiating leases and expects AER to maintain net spreads off Q3 FY23 levels (778 bps) and modest growth in average leased assets (+3% Y/Y in FY24 and +2% Y/Y in FY25). 

Following General Electric Company's GE ownership exit, the analyst projects the company to sell fewer aircraft and expects net gain on sale to moderate from elevated FY23 levels.

The analyst FY23 adjusted EPS of $10.34 ($8.45 excluding forecast for $1.87 per share full-year net gain on sale). 

AL: The analyst forecasts rental of flight equipment growth of around +10% Y/Y in FY24 and +12% in FY25 and projects market dynamics to help drive continued lease rate expansion (+7bps Y/Y in FY24) in the near term. 

The analyst estimates adjusted EPS of $5.40 (8% above consensus) in FY24 and $6.48 (9% above consensus) in FY25. 

At a Market Perform rating, the analyst initiated coverage on disruptive-tech lenders Affirm Holdings Inc AFRM and SoFi Technologies Inc SOFI at a price target of $44 and $9.

AFRM: Fotheringham expects AFRM's interest income as a percentage of the loans held for investment, assuming a 22% return in FY24 and FY25. Also, the analyst expects +20% growth in GMV through FY24 and FY25, implying FY24 GMV of $24.3 billion (in-line with guidance). 

The analyst estimates diluted EPS of $(2.74) in FY24 and $(2.16) in FY25, 5% and 6% below consensus, respectively.

SOFI: The analyst sees SOFI as more sheltered than many of its non-bank financial peers from the historical pitfalls suffered by other innovative financial business models, with SOFI's credit disclosures aligned with that of all other bank holding companies via standardization of FR Y-9C forms released quarterly by the Fed.

The analyst estimates EPS of $0.05 in FY24 and $0.19 in FY25, both 7% below consensus due to lower expected origination volumes and higher provisions for credit losses.

Photo via Wikimedia Commons