Banking group’s resilience will win out

By Sam Boughedda 

Oppenheimer analysts cut the firm’s price target on banking stocks such as Goldman Sachs (NYSE:), Citigroup (NYSE:), Morgan Stanley (NYSE:), JPMorgan (NYSE:), and Bank of America (NYSE:) in a note to clients.

In the note, the analysts moved the price target on:

• Goldman Sachs to $492 from $512 per share
• BofA to $51 from $52 per share
• Citigroup to $87 from $90
• Morgan Stanley to $97 from $102
• and JPMorgan to $169 from $174

Despite the price target cuts, the analysts said they see the fiscal fourth quarter and 2023 as being steadier than most think.

“Bank investors remained scarred by the long shadow of the Great Financial Crisis and are chronically prone to great worry about things that are absolutely not big deals on a fundamental basis,” they explained. “The first of these was the 2011 fret over whether US banks would lose boatloads on their exposures to European banks; they lost not a penny. In 2016, there was the fret over the collapse in energy prices; it cost well below 1% of earnings. In December 2018, there was a big fret about something or other that we never quite understood, but it went away without damage as well. And of course there was the COVID-19 fret, which certainly disrupted the whole world but didn’t hurt banks any more than any other industry.”

The analysts said the latest worry is that deposit volumes are falling, but they think this will also pass.

“The reason deposits are coming down is that they were rapidly pushed to unsustainably high levels by the COVID stimulus. Basically, the Fed printed ~$4.8T of new money with which to buy bonds, and essentially all of that became deposits in the banks. The industry’s loan-to-deposit ratio had averaged ~76.7% in the decade before COVID, and this plunged to a low of 59.5% in late 2021,” they wrote.

However, they did state that a near-term wild card in terms of reported GAAP earnings, as opposed to core economic earnings, is whether there will be CECL reserve builds somewhere along the way.

“We suspect that may happen, but we also suspect they might be reversed back into earnings in late 2023E or 2024E. In any case, our best guess is that they would be less than ~10% of pre-provision earnings. The group continues to plow along with a mid-teens core economic ROTCE, but the multiple has continued to compress to a 49% relative P/E. Ultimately, we believe the group’s resilience will win out and the multiple will revert to a mid-70s relative P/E.”