Goldman Sachs Looking for Divergence to Emerge Among Banks (WFC) (JPM) (HBAN) (BAC)

Goldman Sachs commented on U.S. banks Wednesday and said that despite limited visibility and uncertainty, they are looking for divergence in fundamentals among the group.

The firm notes that after strong Q2 results, U.S. bank stocks have declined on Europe concerns, lower-for-longer rates after "operation twist," and the Fed's downgrade of the economy. Given the macro concerns, correlations are at all-time highs. That said, the firm believes Q3 results could show the highest divergence in some time.

Specifically, Goldman said mortgage will be one of the few bright spots. Higher volumes and widening gain on sale spreads should drive quarter-over-quarter mortgage revenues up 30%-40%, the firm said. Banks like Wells Fargo (NYSE: WFC), New York Community Bancorp Inc. (NYSE: NYB), JPMorgan (NYSE: JPM) and Huntington Bancshares Inc. (Nasdaq: HBAN) will be the likely benefactors.

Also, lost in the headlines is the fact that loans are growing again. C&I is up 3% quarter-to-date at large banks, while consumer loans are also improving.

Commenting on European risks, the firm believes the direct impacts are manageable. However, indirect impacts – contagion, a sell-off in risk assets, and risk aversion – are the bigger concerns.

With revenues remaining challenged near term, expenses and reducing funding costs will be key.

Q3 results will differentiate between the strong and weaker banks, Goldman said. Wells Fargo (NYSE: WFC), US Bancorp (NYSE: USB), JPMorgan (NYSE: JPM) and Huntington Bancshares Inc. (HBAN) are best positioned.

The firm took down Q3 estimates on average of 8% due to much-weaker than-expected capital markets revenues and additional pressure on NIM. Price targets were lowered by 2% on average, although 31% upside to current prices is seen.

Price Target Changes:
Bank of America (NYSE: BAC) (Buy) from $10 to $9
JP Morgan (NYSE: JPM) (Buy) from $49 to $45
Wells Fargo (NYSE: WFC) (Buy) from $33 to $34
Citigroup (NYSE: C) (Neutral) from $41 to $35
PNC (NYSE: PNC) (Neutral) from $56 to $57
USB (NYSE: USB) (Neutral) from $28 to $29
Morgan Stanley (NYSE: MS) (Neutral) maintained at $20
BankUnited, Inc. (NYSE: BKU) (Neutral) from $27 to $24
KeyCorp (NYSE: KEY) (Neutral) from $7.50 to $7.00

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