Goldman Analysts Are Buying Wells Fargo; Like JPMorgan Less

• Shares of both Wells Fargo & Co WFC and JPMorgan Chase & Co. JPM have lost 5 percent since October 12.
• Goldman Sachs’ Richard Ramsden upgraded the rating for Wells Fargo to Buy, while downgrading the rating for JPMorgan to Neutral.
• While Wells Fargo’s shares do not reflect the company’s ability to meet or exceed 2017 expectations, JPMorgan’s shares appear overvalued, Ramsden stated.

Analyst Richard Ramsden said that investors seem to be “overly discounting” the potential of banks to meet the Street expectations, especially in view of “the front-loaded benefit” from increased rates, healthier US consumers, manageable credit headwinds and prospects of an improvement in capital return.

Wells Fargo

“Among banks in our coverage we think WFC has the clearest path to meet Street ‘17E EPS, which the market is not currently paying for,” Ramsden wrote.

He added that investors seemed to be underappreciating the following catalysts for Wells Fargo’s shares:

1. Early data points after liftoff suggest Wells Fargo as the “clear winner,” with retail, small balance deposit bases expected to witness much less pricing pressure as rates rise
2. Ramsden estimates a 2-3 percent potential upside from the GE Capital acquisition in 2017, with the deal expected to close in 1Q16
3. Best positioned G-SIB in ride through tough patch: “If we get an environment where oil prices grind lower, China slows, and rates stay flat, we see the least downside to WFC’s EPS for G-SIBs,” the analyst commented.

The price target has been raised from $59 to $60, reflecting Wells Fargo’s ability to generate improved out year growth by capturing more upside from higher rates and growing earnings inorganically. The EPS estimate for 2017 has been raised from $4.83 to $4.85.

JPMorgan

Since January 26, 2009, JPMorgan’s shares have gained 141 percent, versus a 130 percent rise in the S&P 500. “Heading into 2015, we favored JPM on its ability to optimize its cost base and balance sheet as well as its underappreciated upside to higher rates,” Ramsden mentioned.

He added, however, that except for higher rates, all the drivers had materialized through 2015, and now the valuation seems to “accurately” reflect the strength of JPMorgan’s core franchise. Among the G-SIB banks in Goldman Sachs’ coverage, JPMorgan witnessed the greatest multiple re-rating in 2015.

“Over the longer term, JPM is still among the banks best positioned to produce strong returns but with the potential introduction of more onerous capital rules for large-cap banks into CCAR, we see risk that JPM’s capital return improvement story will be more muted in the near term (which also limits the ROE improvement story),” the analyst mentioned.

While JPMorgan’s profitability is expected to continue to improve, the company has already benefited from optimizing its cost base and lower capital requirements. Although JPMorgan should “continue to produce positive operating leverage,” meeting management’s ROE target could require the operating environment to improve, Ramsden said.

The price target has been reduced from $75 to $69.