Analyst Downgrades Goldman Sachs, Prefers Morgan Stanley And Wells Fargo

With big bank earnings just around the corner, one analyst has downgraded Goldman Sachs Group Inc GS and said there’s little change of earnings upside in the near term.

The Analyst: On Thursday, Bank of America analyst Ebrahim Poonawala downgraded Goldman Sachs from Buy to Neutral and cut his price target from $490 to $475.

Related Links: Why A Federal Reserve Interest Rate Hike Could Be Closer Than You Think

The Thesis: In the downgrade note, Poonawala said Goldman has an impressive asset management business, but it has yet to prove its consumer and wealth management strategy will pay off for investors.

Poonawala said he expects a tough year for growth in capital markets revenue in 2022 for Goldman and anticipates a cool-down in both trading activity and IPO activity this year. In addition, he said Federal Reserve rate hikes could weigh on investor enthusiasm for non-profitable startups.

Instead of Goldman, Poonawala said he prefers investment bank competitor Morgan Stanley MS ahead of big bank earnings season.

“We believe that Morgan Stanley-MS offers a better risk/reward-driven by a more defensible revenue profile (approx. 40% of revenues derived from wealth and investment management), rate sensitivity (100bp in higher interest rates = $1.5bn to spread revenue), potential to drive deal synergies (Eaton Vance, E*Trade, Solium) and exposure to higher growth (= higher P/E) businesses,” Poonawala said.

Poonawala also named Wells Fargo & Co WFC his top overall big bank stock pick due to its EPS sensitivity to interest rates and its lending rebound potential. He is also bullish on Citigroup Inc C ahead of its upcoming investor day event in March.

Benzinga’s Take: After a big year in 2021, investors again have some high expectations for bank stocks in 2022. The higher interest rates rise, the more net interest income banks can generate from their lending businesses.