Goldman Sachs is still super bullish on bank stocks even after their monster run.
Goldman bank analyst Richard Ramsden said Monday in a new note that first quarter earnings season for the major banks — which kicks off later this month — will show three positive bank stock catalysts.
First, with the economy improving at a rapid clip from the COVID-19 pandemic banks are likely to release reserves taken to cover losses from the effects oft the health crisis. Ramsden estimates banks will release $5.6 billion of reserves in the first quarter, representing about 15% of earnings per share upside.
Second, net interest margins are likely to show further improvement sequentially amid the rise in yields in the quarter. And lastly, Ramsden believes banks are poised to show strong fees in their investment banking divisions due to capital markets strength (see SPAC issuances, mergers, trading strength).
Ramsden foresees the first quarter being a stepping stone to a solid year for the banks in 2021, likely leading to higher stock prices.
"Looking ahead to the balance of the year and into 2022, we expect an optimistic tone around the outlook, given that: 1) strong reserve releases look set to continue and contribute to an ongoing strong excess capital return story. Moreover, 2) we remain more optimistic about the NII [net interest income] trajectory, as rates continue to rise and banks remix cash into higher yielding assets," Ramsden said.
In particular, Ramsden projects the major banks will repurchase $83 billion in stock this year, or 6% of their market cap. That figure could jump to more than $100 billion in 2022, Ramsden thinks.
The analyst's top picks include Morgan Stanley, Citigroup and Bank of America. He is most subdued on Wells Fargo.
Anything less than the solid first quarter for the banks outlined by Ramsden and many of his peers (Deutsche Bank sees 30% to 50% upside in bank stocks over the next two to three years, for instance) will probably be met harshly given the run-up in the sector.
The Invesco KBW Bank ETF has climbed an impressive 25% year-to-date, according to Yahoo Finance Plus data, as investors have grown upbeat on the economic recovery and how rising yields could drive higher margins for the banks. By comparison, the S&P 500 is only up 7% on the year.
Out of the top bulge bracket Wall Street firms, Bank of America shares have led the way with a 30% pop year-to-date.
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