Goldman Sachs Said In Bank-land "Earnings Matter Again" (BAC, JPM, WFC)
Goldman Sachs issued an extensive note on banks stocks today, saying the lesson learned from the third quarter results is that the "bottom line matters once again."
The firm noted that banks reporting positive EPS outperformed banks reporting loses by 1300 bps in October. They attribute this to a shorter timetable to normalized earnings, increased flexibility for dividend hikes, and increased opportunity for capital to be redeployed into lending growth in 2010.
The firm still favors large banks (Attractive) over regionals (Cautious) and specifically favors Bank of America (NYSE: BAC) ($20 tgt), JP Morgan (NYSE: JPM) ($54 tgt) and Capital One (NYSE: COF) ($50 tgt)- all Conviction Buy List rated.
Goldman noted that three-quarters of large banks made money this quarter versus only one-third of regionals.
Assuming that the large banks take two years to reach normalized earnings, the firm calculated the implied discount rate is 27% for JPM, BAC, and Wells Fargo (NYSE: WFC) (Buy, $35 tgt). Conversely, implied discount rates for regionals average 16%.
The firm sees "normalized EPS" of $2.65 for Bank of America, $6.54 for JP Morgan, $4.65 for Wells Fargo, $5.98 for PNC (NYSE: PNC) (Neutral, $54 tgt) , and $2.34 for US Bancorp (NYSE: USB) (Neutral, $23 tgt).
Goldman also noted that cash on the balance sheets of banks remains high. They say the system as a whole has about $1.2 trillion in cash, more than triple pre-Lehman levels.
The firm firm raised their price target on PNC from $38 to $54 after raising their "normalized EPS" view from $5.50 to $6, and raised their price target on Morgan Stanley from $32 to $36 on higher estimates too.
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