KBW Upgrades Bank Of America, Goldman Sachs To Outperform

Following the election, the Universal Banks outlook for 2017 and beyond now reflects higher interest rates, only modest benefits from deregulation and better trading results due to increased volatility, Keefe, Bruyette & Woods’ Brian Kleinhanzl said in a report. He raised the 2018 EPS estimates by 9 percent and projected an average total return of 9.9 percent for the group.

The macro outlook now includes the assumption of a 25bps (basis point) hike in the Fed’s interest rate in December 2016, two additional hikes of 25bps each in June and December of 2017, and two increases in June and December of 2018, as compared to the prior forecast of just a single 25bps increase in late 2018, Kleinhanzl mentioned.

Moreover, the 10-year treasury rate is now expected to reach 2.50 percent by end-2017 and 2.75 percent by end-2018.

Upgrades

Kleinhanzl upgraded the ratings on Bank of America Corp BAC and Goldman Sachs Group Inc GS from Market Perform to Outperform, while raising the price targets from $17.50 to $23 and from $185 to $240, respectively.

Although Bank of America’s shares have appreciated 20.5 percent post-election versus a 13.5 percent gain by peers on average, potential upside remains from an improved earnings outlook.

“As we look to 2018, we expect BAC to post 6.9 percent positive operating leverage as the combined benefit of higher rates and the ongoing cost save program help push BAC’s operating leverage to best among peers (2.6 percent average operating leverage),” the analyst commented.

Kleinhanzl believes investors would be “best positioned” to benefit from increased volatility and trading volumes by owning Goldman Sachs’ shares. The earnings estimates for 2017 and 2018 have been raised by 11.8 percent and 13.9 percent, respectively. While the price target has been raised, a faster improvement in global economic growth or deregulation on a wider scale may lend further upside.

Price Target Revisions

Kleinhanzl reiterated Outperform ratings on JPMorgan Chase & Co. JPM and Bank of New York Mellon Corp BK, while raising the price targets from $77 to $88 and from $50 to $54, respectively.

“We continue to believe that rising consensus estimates, actual increases in the fed funds rates, and actual policy proposals on the state of the regulatory environment in the future will keep Universal bank stocks moving upward — but the pace of relative outperformance will slow versus the recent performance period post election,” the analyst wrote.