Oppenheimer analyst Chris Kotowski weighed in on the banking industry following the Brexit, providing near term predictions for upcoming 2Q16 earnings reports.
While the markets have generally recovered from the Brexit, “it seems likely to us that the uncertainty caused by [Brexit] will weigh on bank [earnings] results,” states the analyst. The analyst explains the economic implications followed by Brexit. First, he predicts significantly less capital spending in the UK and Europe due to uncertainties regarding terms of trade and tariffs. He believes this will particularly reduce M&A activity in both the UK and Europe in 2017 more than in 2016, as it generally takes about 6 months for any transaction to close. Moreover, the analyst predicts a recession in the UK as a result of the Brexit with and believes it could transfer to the rest of the EU. Due to short term Brexit implications, the analyst is reducing his short term revenue estimates for the entire banking and trading industry and predicts a slight decline in loan growth.
Despite short term implications and a “drag in earnings”, the analyst is still optimistic regarding the credit quality and balance sheets of big banks, and believes they can handle any volatility “with flying colors.” He explains, “We think investors generally underappreciate how much banks have de-risked their balance sheets from both a lending and a trading perspective.” Kotowski notes that 3Q16 results, rather than 2Q16, will suffer more from the Brexit due to the late date of the Brexit vote in the last quarter. According to the analyst, another Fed rate hike is also “off the table for the indefinite future” and believes the dollar will rise, negatively impacting the U.S. economy as well.
As a result of the Brexit, the analyst provides his updated insights on bank giants Bank of America Corp (NYSE:BAC), Citigroup (NYSE:C), and Goldman Sachs Group Inc (NYSE:GS). Despite Brexit upheaval, the analyst believes the resulting selloff represents a compelling entry point for the three bank giants. The analyst notes that bank stocks are trading at a 61% relative P/E. However, the analyst reduces his price target for all three to account for the short term implications of the Brexit.
Bank of America Corp
Kotowski reduces his 2Q16 EPS estimate for Bank of America from $0.43 to $0.40. He explains, “Of this about $0.03 is due to negative adjustment related to FAS 91 because long rates decline, partially offset by stronger trading results than we had previously estimated.” The analyst also reduces his FY17 EPS estimates from $1.64 to $1.50 due to an unlikely rate hike in the short term, lower than expected short term investment banking and trading revenues, slower loan growth and 10% higher charge offs than he originally predicted. The analyst reiterates an Outperform rating on Bank of America and reduces his price target to $18 from $20.
According to TipRanks, out of all the analysts who have rated BAC in the last 3 months, 82% are bullish while 18% remain on the sidelines. The average 12-month price target for the stock is $17.88, marking a 40% upside from current levels.
The analyst also reducers his estimates for Citigroup, decreasing his 2Q16 EPS estimate from $1.31 to $1.13. Kotowski attributes $0.07 of that decline to increased non-compensation and repositioning expenses, $0.05 to decreased commission and fees, $0.04 to lower insurance fees, and $0.01 to a 2pbs decline in net interest margin relative to his previous estimates. The analyst also reduces his 2017 EPS estimate from $5.82 to $5.13 for the same reasons he reduced his BAC estimate. The analyst reiterates an Outperform rating Citigroup and reduces his price target from $70 to $63.
According to TipRanks’ statistics, out of all the analysts who have rated the company in the past 3 months, 67% gave a Buy rating while 33% remain neutral. The average 12-month price target for the stock is $55.60, marking a 36% upside from current levels.
Goldman Sachs Group Inc
The analyst significantly reduces his 2Q16 EPS estimate for Goldman Sachs from $4.05 to $2.91. Kotowski attributes $0.25 of the reduction to lower investment banking revenues, $0.45 to lower investing and lending revenues, $0.15 to lower asset management and $0.32 to higher than predicted legal expenses. For 2017, the analyst reduces his full year EPS estimates from $20.16 to $17.50 due to a lower base of 2016 revenues, a lack of growth in investment and trading revenues, reduced investing and lending revenues, and lower asset management revenues due to the unfavorable impacts of the Brexit on capital markets. The analyst reiterates an Outperform rating on Goldman Sachs and reduces his price target from $243 to $214.
According to TipRanks, out of the 8 analysts who have rated the company in the last 3 months, 4 gave a Buy rating and 4 maintain a Hold rating. The average 12-month price target for the stock is $188.29, marking a 30% upside from current levels.