The emerging scenario of sustained high interest rates could boost profitability for U.S. banks.
That's the comment from Goldman Sachs analyst Richard Lumsden, who offered a cautiously optimistic outlook for the second-quarter earnings season in a note on Monday.
The first to report on July 12 are JPMorgan Chase (JPM), Wells Fargo (WFC), Citigroup (C), and Bank of New York Mellon (BK). Goldman Sachs (GS) and Bank of America (BAC) are scheduled to report on July 15 and 16, respectively.
Analysts optimistic ahead of banks' second-quarter results
“In an environment of elevated long-term interest rates, longer-term rate sensitive assets continue to reset at elevated prices, muting pressures on deposit costs,” Ramsden wrote.
Goldman Sachs expects banks to report average quarterly revenue growth of 7% year-over-year. Trading revenue growth is expected to be the stronger segment, averaging 6% in the second quarter of 2024 and 3% for the full year, compared with 2% following the release of fourth-quarter 2023 earnings.
Goldman Sachs expects fees to increase 8% year over year in the second quarter of 2024, driven by a 35% increase in investment banking fees, an 11% increase in asset management fees due to market strength, and rising mortgage fees from low bases.
Key risks for banks
Although underwriting standards for both commercial and consumer loans have eased since their peak in late 2023, lending growth remains slow, primarily due to weak demand for commercial loans.
Goldman Sachs also predicts a continued deterioration in banks' credit assets, particularly those related to credit cards and commercial real estate, which are expected to remain above pre-COVID-19 levels through 2026.
In the near term, pressures on the SCB, G-SIB and SLR buffers are likely to restrain banks’ appetite for increased share buybacks.
Attractive evaluation
Valuations remain somewhat attractive, with large banks, on average, trading at about 1.5x estimated 2025 tangible book value (TBV), including the impact of accumulated other comprehensive income (AOCI), (about 1.4x if AOCI is added).
Big banks' price-to-earnings multiples are currently trading at about 55% of the S&P 500 index, compared with an average historical discount of 61%.
“This discount potentially makes it a somewhat attractive entry point given that headwinds for banks may ease and stocks could rise after the US presidential election,” Ramsden said.
Bank stocks to watch
Goldman Sachs remains positive on Bank of America (BAC), Wells Fargo (WFC), and Citigroup (C), which it has buy ratings on. For BAC, it is positive on the net interest income (NII) trajectory through 2024, expecting it to bottom in the second quarter before accelerating again later in the year.
For WFC, the removal of the asset cap will allow it to reinvest in regaining lost deposit market share, and is expected to boost earnings by supporting growth in its traditional banking and trading businesses alongside idiosyncratic cost savings.
Goldman Sachs expects WFC's pre-provision net revenues (PPNR) to be 3% higher than consensus, as fee income and core expenses rose 3% in the quarter, as expected.
Price Targets and Upside Potential
Bank Stocks 7/1 Goldman Sachs Target Price Increase Likelihood Wells Fargo $60.44 $7117.5% Morgan Stanley $99.09 $11213% Citigroup $63.46 $7213.4% Bank of America $39.97 $4512.9% JPMorgan Chase $205.90 $22710.3% US Bancorp (USB) $39.19 $427%
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