Analyst Outlines Finance Stocks Vulnerability, Tensions Rise for Ally Financial And Goldman Sachs While Aircraft Lessors Take Flight

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By Ronald Tech

BMO Capital Markets analyst James Fotheringham took a balanced view on specific industries, signaling caution for finance stocks and enthusiasm for aircraft lessors in the wake of financial market volatility.

Fotheringham’s analysis indicates that banks and specialty finance shares saw a remarkable upsurge by almost +40% into year-end (compared to SPX +13%) and now face exposure to an imminent credit cycle and notably elevated capital requirements.

Fotheringham warns that credit quality across the board is deteriorating, putting pressure on lenders to meet higher capital thresholds.

The analyst downgraded auto lender Ally Financial IncALLY and investment bank The Goldman Sachs Group IncGS to Market Perform from Outperform, setting price targets at $36 and $357, respectively.

The downward revisions reflect pervasive concerns over these consumer credit stocks, which are sensitive to rising net charge-off rates for credit card loans and prime auto loans.

ALLY: Fotheringham perceives ALLY’s earnings as highly subject to the impact of lower interest rates on net interest margins, while slowing loan growth and rising credit costs pose significant headwinds. 

Fotheringham forecasts that the Fed funds rate will decrease to approximately 5% by the end of next year, with rate cuts commencing in the second half of FY24. He predicts further rate reductions in 2025, with Fed funds reaching roughly 3.5% by the close of FY25.

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

GS: Looking ahead, Fotheringham worries about GS’s expanding pro forma exposure to potentially volatile global banking & markets revenues and the pressure on its cherished corporate culture from declining revenue pools in key businesses.

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

Reversing course to an Outperform rating, Fotheringham initiated coverage on aircraft lessors AerCap Holdings NVAER and Air Lease CorpAL with price targets of $103 and $54, respectively.

Fotheringham is buoyant on these companies benefiting from an air travel industry that offers more passengers than seats.

With aircraft manufacturing down 40% since the pandemic, AER is leveraging this supply/demand mismatch by selling assets at substantial book value premiums and utilizing sale proceeds to repurchase its own shares below book value, as per the analyst.

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AER: The analyst believes that favorable market dynamics position the company well to negotiate leases and expects AER to sustain 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). 

In the wake of General Electric Company‘sGE ownership exit, the analyst projects the company to sell fewer aircraft with a projected moderate net gain on sale from elevated FY23 levels.

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

AL: The analyst anticipates rental of flight equipment growth of approximately +10% Y/Y in FY24 and +12% in FY25, with market dynamics driving 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.

Fotheringham, while rating them at Market Perform, initiated coverage on disruptive-tech lenders Affirm Holdings IncAFRM and SoFi Technologies IncSOFI with price targets of $44 and $9.

AFRM: Fotheringham expects AFRM’s interest income as a percentage of the loans held for investment to reach a 22% return in both FY24 and FY25. Furthermore, he anticipates +20% growth in GMV through FY24 and FY25, indicating FY24 GMV of $24.3 billion, in line with guidance.

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

SOFI: The analyst perceives SOFI as more sheltered than many of its non-bank financial peers from the historical pitfalls faced by other innovative financial business models, with SOFI’s credit disclosures aligning with 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.