3 Goldman Bank Picks for 4Q Earnings

NEW YORK ( TheStreet) -- Goldman Sachs unveiled its top Americas bank picks Wednesday in a preview of fourth-quarter earnings.

Analysts at Goldman see a "mixed" earnings picture for the fourth quarter, despite expectations for increased lending and dividend payouts and an improving credit picture in the year ahead as its economists estimate robust GDP growth of 3.4% for the new year.

In terms of loan growth, the report from analysts Richard Ramsden, Ryan Nash and Daniel Paris notes recent Federal Reserve data shows a pick up in "jumbo" residential mortgage loans as well as commercial and industrial and consumer lending. However, commercial real estate, credit cards and home equity are all areas showing shrinkage.

As for fees, the report sees declining capital markets revenues, driven largely by a drop in fixed income, currencies and commodities, though that should be offset to an extent by strength in equities, Goldman analysts predict. Mortgage banking revenues also look weaker as a result of higher interest rates, according to the report, which argues the trend bodes ill for Wells Fargo ( WFC).

Goldman's analysts see increasing book value growth for the banks, though they argue the increase in Treasury rates will lead to lower unrealized gains in banks' securities portfolios.

"While bank securities portfolios vary in both composition and duration, there has historically been a strong relationship between moves in the 10-year Treasury yield and unrealized gains/losses on the security portfolio," the report states, arguing the selloff in Treasuries could generate a 1.0-1.5% drop in book value for large cap banks.

Like many analysts and investors, Goldman expects higher dividends from Wells Fargo, JPMorgan Chase ( JPM), U.S. Bancorp ( USB)and PNC Financial ( PNC), but says increases from Citigroup ( C) and Bank of America ( BAC) are "uncertain."

Goldman also sees merger and acquisition activity picking up in 2011 and its analysts argue U.S. Bancorp and PNC Financial are the "most likely acquirers," according to the report. However, the analysts note acquirers may have a tougher time aggressively marking down assets than they did previously.

Regulation will also remain an issue for banks, according to the report, which points to the crackdown on "interchange fees" which credit card lenders charge to merchants, as one prominent example.

Still, Goldman's analysts identified three banks they believe will stand out in the upcoming earnings reports, as well as in the rest of 2011. Here are their picks:

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3. JPMorgan Chase

Goldman analysts see JPMorgan earning $1.05 per share in the fourth quarter, which compares to the SNL Financial consensus estimate of $0.98. Goldman sees JPMorgan earning $4.85 in 2011 and $6.10 in 2012.

Goldman sees minimal losses to JPMorgan on put-backs of mortgage-backed securities (MBS) from Government Sponsored Entities (GSEs) Fannie Mae ( FNMA.OB)and Freddie Mac ( FMCC.ON). Using Bank of America's recent settlement with the GSEs as a template, the Goldman analysts argue "JP Morgan could potentially 'be done' providing for GSE losses as soon as this quarter."

As for so-called "private label" MBS, meaning MBS that were guaranteed by banks as opposed to GSEs, Goldman's analysts estimate about $6.5 billion in losses. They note that JPMorgan has said 45% of its private label MBS performed well for two years before going delinquent and argue putback claims tend to focus on loans that become delinquent at an earlier stage, as it is easier to prove banks made false claims to investors.

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2. Citigroup

Goldman's analysts did not provide a detailed discussion of Citigroup in Wednesday's report, though they argued in a Dec. 6 report that the valuation at the time implied a much lower return on assets and return on equity than the 1.2% ROA and 16% ROE estimated by Goldman once Citigroup completes the runoff of its Citi Holdings unit. Citi Holdings refers to a group of assets Citigroup has designated for sale or runoff. The bank has been steadily shrinking Citi Holdings since it created the unit.

Goldman also cites Citigroup's potential to grow revenue in its emerging markets businesses in its recommendation. As for exposure to private label MBS, Goldman says "exposure is small relative to peers."

Goldman has a $5.50 price target for Citigroup, while estimating it will earn seven cents per share in the fourth quarter. That is slightly below the consensus estimate of eight cents per share, according to SNL Financial.

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1. Bank of America

Goldman has a $16 price target on Bank of America, compared to BofA's $14.97 price early Wednesday afternoon. Goldman analysts 15 cent per share estimate for the fourth quarter is 38% shy of the 24 cent consensus, according to SNL Financial. Goldman sees declining mortgage banking revenue for Bank of America in the quarter. However, Goldman sees strong revenues for Bank of America in equity capital markets and a positive tone on loan growth.

"You'll see loan growth get back to sort of GDP equivalent growth from the core book going forward. But I wouldn't expect to see loan growth streaming ahead largely due to fact that we're all careful on the risk right now and economy is just not there to really support it," said Bank of America management at Goldman's recent financial services conference.

Bank of America also got an upgrade from Wells Fargo Securities Wednesday.

-- Written by Dan Freed in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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