Analyst Says Goldman Sachs, Wells Fargo Offer 'Most Interesting Risk-Reward' Ahead Of Bank Earnings Week

Big bank earnings season kicks off this week, and Bank of America analyst Ebrahim Poonawala said Wednesday that he has high hopes for at least two bank stocks.

Big Numbers Coming? Despite concerns about a U.S. recession, Poonawala said he expects most banks will report strong loan demand, little credit stress and expanding net interest margins in the second quarter.

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"While stocks appear discounted at 8-9x 2023 P/E vs. 11-13x historical average, investors [are] (rightly) worried about downside risks to 2023 EPS from slower growth (demand destruction), higher credit costs (recession) and declining margins (Fed rate cuts)," he said.

Unless macroeconomic circumstances change dramatically, such as an end to the Ukraine war or a significant downturn in inflation, Poonawala said the market will likely continue to view most bank stocks unfavorably in the near-term.

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Depressed Valuations: Poonawala's updated bank stock price targets assume a 50% probability of a U.S. recession. In the uncertain environment, he said Wells Fargo & Co (NYSE: WFC) and Goldman Sachs Group Inc (NYSE: GS) have the most attractive risk-reward profiles heading into earnings season.

For Wells Fargo, Poonawala said he expects the bank to revise its spread revenue guidance higher, which will lift fiscal 2023 EPS. If Goldman can give the market confidence it can deliver on its targeted 15% to 17% return on tangible equity (ROTE), Poonawala said the stock can re-rate higher.

Bank of America has a Buy rating and $50 price target for Wells Fargo, and a Buy rating and $380 price target for Goldman Sachs.

Benzinga's Take: Higher interest rates are generally good news for bank earnings because they boost net interest margins, the difference between the rates a bank charges on loans and the rates it pays out on deposits. However, if interest rates rise too high too fast they trigger an economic downturn, loan demand and bank revenue can start to fall.