By Philip van Doorn, MarketWatch
For Goldman Sachs, the KBW team sees “compelling” valuation for the shares, based on their earnings projections.
Chris Kotowski and the team of analysts at Oppenheimer used the Federal Reserve’s “severely adverse” economic scenario from last year’s industry stress tests to estimate banks’ earnings performance through a coronavirus recession. That scenario includes a peak unemployment of 10%, which may turn out to be rather low for 2020.
The analysts expect unemployment to peak between July and September, leading to maximum loan losses during the first quarter of 2021. “Thus, we see core economic earnings (i.e. pre-provision earnings less net charge-offs) declining throughout 2020, bottoming in 1Q21, and returning to more or less normal by 4Q21,” Kotowski wrote in a note to clients on March 31.
The large banks have stopped buying back shares in an effort to build up capital. Kotowski doesn’t believe the banks will need to raise capital by issuing new shares.
Some analysts have said that industry dividends appear to be safe, but Kotowski is more cautious. He expects the large banks to earn enough to cover their dividends on a full-year basis for 2020 and 2021, even though there will be some quarters during which they don’t.
“We suspect that whatever happens on the dividend-reduction front will be similar to when the Financial Services Forum announced that all the large U.S. banks would suspend share buybacks in unison.”
That announcement was made in mid-March. If the big banks go on to suspend dividends, Kotowski expects a similar industry-group announcement, since individual decisions “would stigmatize the first bank to announce such a move as ‘weak.’ ”
Here are Oppenheimer’s updated and previous estimates for the same group of large banks for 2020 and 2021:
|Bank||Ticker||2020 EPS estimate - March 31||2020 EPS estimate - previous||2021 EPS estimate - March 31||2021 EPS estimate - previous|
|J.P. Morgan Chase & Co.||JPM||$7.72||$10.89||$7.55||$11.85|
|Bank of America Corp.||BAC||$1.93||$2.93||$1.85||$3.20|
|Wells Fargo & Co.||WFC||$2.50||$3.92||$2.79||$4.32|
|Goldman Sachs Group Inc.||GS||$9.52||$25.08||$18.55||$27.62|
Oppenheimer has “outperform” ratings on Bank of America, Citigroup, /zigman2/quotes/207741460/composite C +1.11% , Goldman Sachs and Morgan Stanley /zigman2/quotes/209104354/composite MS +2.99% , with neutral “perform” ratings on J.P. Morgan and Wells Fargo /zigman2/quotes/203790192/composite WFC +0.37% .
Here are Oppenheimer’s updated price targets for the four buy-rated banks:
|Bank holding company||Ticker||Price target - March 31||Previous price target||Closing price - April 6||Implied 12- to 18-month upside potential based on new price target|
|Bank of America Corp.||/zigman2/quotes/200894270/composite BAC||$30.00||$45.00||$21.39||40%|
|Citigroup Inc.||/zigman2/quotes/207741460/composite C||$93.00||$122.00||$41.12||126%|
|Goldman Sachs Group Inc.||/zigman2/quotes/209237603/composite GS||$278.00||$367.00||$158.23||76%|
|Morgan Stanley||/zigman2/quotes/209104354/composite MS||$46.00||$76.00||$37.01||24%|