Banking, finance, and taxes

Goldman Sachs Makes Key Bank Rating Changes Into Rate Hikes

Jon C. Ogg

Published: January 11, 2016 11:25 am

Last Updated: January 13, 2020 3:11 pm

Some analyst calls are just too big to ignore. This week is supposed to kick off the fourth-quarter earnings season and will bring certain outlooks for 2016. The big banks do not offer financial earnings guidance, but Goldman Sachs has decided to change its ratings on some of the top banks just days before they report earnings.

There were other winners in the banking sector calls made by Goldman Sachs on Monday. This does not include the asset managers and exchange outfits, which were also given ratings changes.

In the top analyst upgrades and downgrades for Monday, 24/7 Wall St. tracked the Goldman Sachs analyst downgrade of JPMorgan Chase & Co. (NYSE: JPM). While this is a Dow Jones Industrial Average stock, there was actually a lot more to the broader call. JPMorgan’s rating was cut to Neutral from Buy, and the Goldman Sachs price target was cut to $69.00 from $75.00.

The Goldman Sachs target of $69 on JPMorgan shares still indicates $10 upside, and the 2.7% yield would imply a total return expectation of almost 20%, if you include the dividend. Does it matter if JPMorgan’s consensus analyst price target was closer to $73 before this call?

Wells Fargo & Co. (NYSE: WFC) found the love of Goldman Sachs, at the expense of JPMorgan. Wells Fargo’s official analyst rating was raised to Buy from Neutral, with a $60.00 price target. Wells Fargo’s $60 price target from Goldman Sachs would imply upside of close to 23%, including its 2.7% yield. Wells Fargo’s consensus analyst price target was closer to $58.65 before this rating change.

Bank of New York Mellon Corp. (NYSE: BK) previously had a Neutral rating at Goldman Sachs, but the firm added it the prized Conviction Buy list. BNY Mellon was also given a $48.00 price target, over $1.00 higher than the $46.89 consensus price target. This bank’s yield is closer to 1.8%, but the key driver here is that the Federal Reserve finally has started to raise rates, which greatly helps custodial and trust banks with massive money market and corporate banking operations, like BNY Mellon.

What Goldman Sachs noted was that it favored JPMorgan heading into 2015, but the downgrade is on the heels of recent outperformance. Its other drivers (including an ability to win from higher rates) have played out or are discounted into the stock now, so it favors Wells Fargo, despite JPMorgan being a cheaper stock against book value.

Three other bank’s saw their ratings changed at Goldman Sachs as well:

• Citizens Financial Group (NYSE: CFG) was raised to Buy from Neutral with a $30 price target. Shares closed most recently at $23.82 and the consensus analyst price target was closer to $28.50. Citizens has only a 1.7% dividend yield.
• KeyCorp. (NYSE: KEY) was raised to Buy from Neutral with a $15 price target. It closed at $11.92, and its consensus price target was $15.13. The 52-week trading range is $11.79 to $15.70, and KeyCorp has close to a 2.3% yield.
• M&T Bank Corp. (NYSE: MTB) was downgraded to Neutral from Buy.

It is always interesting to see when banks and brokerage firms cover their peers and rivals. Goldman Sachs Group Inc. (NYSE: GS) is regulated and officially counted as a bank holding company. The problem is that there is not really a Bank of Goldman Sachs or a Goldman Sachs National Bank branch anywhere in the country. It is where the wealthy go to have their assets and finances managed, but this company just is not a classic bank holding company. That status was delegated under the bank bailouts of the Great Recession. Now Goldman Sachs sees value winners and losers in the 2016 rate hike cycle.