The banking sector is in bad shape as economic uncertainty and the economic fallout from the coronavirus pandemic has crippled the U.S. economy, but Berenberg upgraded Goldman Sachs GS and Wells Fargo WFC to hold from sell. Investors are still examining what is in the stimulus package and how it will help each sector.
Berenberg is still bearish on the banking sector, reducing its price targets in its coverage universe by 33% on average, but there is still material upside for those two banking giants.
Berenberg notes that the banking industry is in a structural decline and that it is operating in an environment where its two traditional strengths (risk management and return focus) are being neutralized by increased activity from the world's central banks. TheStreet's Bret Kenwell recently examined Bank of America BAC and JP Morgan Chase JPM and provided technical analysis on each to provide investing advice.
"While Wells Fargo continues to face strategic risks and uncertainty, we believe these are now better reflected in the share price, trading on 8.3x our 2021E EPS. Moreover, we are mindful that Wells Fargo has the capacity to target meaningful cost savings in order to protect and improve profitability," Berenberg analyst Adam Barrass said.
Meanwhile, Goldman Sachs is also undervalued, according to Berenberg's metrics, as the company is trading at less than 2x forward revenue estimates, a 15% discount to its long-term average.
"At its investor day in January 2020, Goldman Sachs identified USD1.3bn of non-compensation cost savings which it expects to achieve over the next three years. It could accelerate this cost reduction if the operating environment remains challenging," Barrass wrote.
Berenberg did cut its price target on the investment bank to $160 from $190, implying a 7% upside from the stock's previous closing price. Earlier this month, Banks did cut stock buybacks to preserve capital amid the coronavirus outbreak.
Goldman Sachs shares rose 5.5% to $163.61 while Wells Fargo gained 5% to $30.45.