US Banks To Benefit From 'Higher For Longer' Interest Rates: Goldman Sachs Sees 'Modestly Attractive Entry Point' For Investors

The emerging scenario of sustained high interest rates could boost the profitability of U.S. banks.

That’s according to Goldman Sachs analyst Richard Ramsden who, in a Monday note, expressed cautious optimism for the second-quarter earnings season.

Among the first to report on July 12 are JPMorgan Chase & Co. JPM, Wells Fargo & Company WFC, Citigroup Inc. C, and Bank Of New York Mellon Corp. BK. Goldman Sachs Inc. GS and Bank of America Corp. BAC will follow with their reports on July 15 and 16, respectively.

Analyst’s Optimism Ahead Of Banks’ Q2 Earnings

“In the higher for longer rate environment, long rate-sensitive assets continue to reprice higher, and deposit cost pressure is slowing,” Ramsden wrote.

Goldman Sachs anticipates that banks will, on average, report a 7% year-on-year (YoY) revenue growth for the quarter. Trading revenue growth is expected to be a robust segment, projected to average 6% in Q2 2024 and 3% for the year, compared to 2% after fourth quarter 2023 earnings.

Goldman Sachs projects an 8% YoY increase in Q2 2024 fees, led by a 35% rise in investment banking fees, an 11% increase in wealth and asset management fees due to stronger markets, and a rise in mortgage fees from a low base.

Key Risks For Banks

Loan growth remains modest, primarily driven by weak demand for commercial loans, though underwriting standards for both commercial and consumer loans have eased since their peak in the second half of 2023.

Goldman Sachs also foresees a continuing deterioration in banks’ credit assets, especially those tied to credit cards and commercial real estate, although they are expected to remain above pre-COVID levels through 2026.

In the near term, banks’ willingness to increase buybacks will likely be tempered by pressures on Stress Capital Buffers (SCBs), Global Systemically Important Banks (G-SIBs) buffers, and Supplementary Leverage Ratios (SLRs).

Attractive Valuations

Valuation remains slightly attractive, with large banks trading at approximately 1.5 times their estimated tangible book value (TBV) for 2025 on average, including Accumulated Other Comprehensive Income (AOCI) impacts (and about 1.4 times after adding back AOCI).

Large banks are now trading at roughly 55% of the S&P 500 price-to-earnings ratio, compared to a historical average discount of 61%.

“This discount presents a potentially modestly attractive entry point, given the diminishing headwinds for banks and the possibility of upside potential following the U.S. election,” Ramsden stated.

Top Bank Stock Picks

Goldman Sachs remains positive on Buy-rated Bank of America (BAC), Wells Fargo (WFC), and Citigroup (C). For BAC, the firm is constructive on its Net Interest Income (NII) trajectory through 2024, which is expected to trough in Q2 and reaccelerate later in the year.

For WFC, earnings upside is anticipated once the asset cap is lifted, allowing for reinvestment to regain lost deposit market share and support growth in traditional banking and trading, alongside idiosyncratic expense savings.

Goldman Sachs projects a 3% higher Pre-provision Net Revenue (PPNR) for WFC compared to consensus, driven by a 3% increase in fee income and core expenses for the quarter in line with expectations.

Price Targets and Upside Potential

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