Goldman Bullish On Financials, Says Rate Hikes 'Put NII On Growth Path For 2016'

Large cap banks recorded better-than-expected 1Q core EPS, despite their large energy reserves and a challenging quarter for the capital markets. The robust performance was driven by NIM expansion, accelerating loan growth, expense control and benign credit outside of energy.

Goldman Sachs’ Richard Ramsden commented that, assuming a stable market backdrop in the future, the current strong fundamentals implied a bottoming of the EPS estimates. The analyst recommended investments in Buy-rated Bank of America Corp BAC, Citigroup Inc C and Wells Fargo & Co WFC.

Factors Responsible For Growth

Analyst Richard Ramsden highlighted the various factors that helped companies record healthy growth in 1Q:

• Large banks NIMs expanded 5bps, as banks retained most of the benefit accruing from the Fed’s December rate hike.
• Cost-cutting initiatives undertaken by large cap banks have started yielding results, with a 9 percent y/y reduction recorded in comp costs and a 3 percent decline in non-comp costs.
• Although energy provisions represented a 9 percent drag on core EPS, reserves for large-cap banks stand at 6 percent of funded energy loans, or 11 percent of E&P and oilfield service loans.

Ramsden expects robust loan and deposit growth to boost NII growth for the rest of 2016. He added that energy provisions are likely to moderate in the near future.

Changes In Price Target

Ramsden maintained a price target of $17 for Bank of America. He wrote, “We remain most constructive on BAC as shares trade at a 10.5x 2016E P/E despite outsized rate sensitivity and both core and non-core expense leverage.”

The analyst reduced the price target for Wells Fargo from $59 to $58, saying that the company’s growth is likely to be supported by organic and acquisition-driven growth.

The price target for Citigroup has been raised from $52 to $53. Ramsden expects the company’s expense initiatives to pay off and result in strong upside.