Bank of America (BAC) and Goldman Sachs (GS) are scheduled to report quarterly results on January 16, while Morgan Stanley (MS) is expected to announced fourth quarter results on January 17. What to watch for: 1. 1MDB PROBE RISKS: On November 30, BofA Merrill Lynch analyst Michael Carrier downgraded Goldman Sachs to Neutral from Buy and removed the stock from his firm’s U.S. 1 List, stating that the uncertainty around the 1MDB investigation could limit the stock’s upside potential if markets stabilize. While he does not expect the matter to have a long-term impact on the business, Carrier noted that the timing of the investigation is unknown and it may take some time to be resolved. Based on disclosure thus far, he views the more likely outcome as a fine/settlement, though “it is impossible to know the outcome of the matter,” Carrier concluded. Citing similar reasons, Morgan Stanley analyst Betsy Graseck also cut her rating for Goldman Sachs to Equal Weight from Overweight. It is currently unclear how long 1MDB issue will take to resolve, what the fines and penalties could be and what costs Goldman will incur, said Graseck, who does not see the stock’s multiple expanding significantly until the issue is resolved. Goldman Sachs may be liable for nearly $5B due to is role in a Malaysian bribery scandal centered on 1MDB, the New York Post reported last week, citing a research report from Wells Fargo. The bank will likely be forced to forfeit $600M it made in fees, pay at least $1.2B in files to the SEC, and at least another $2.7B in funds returned to Malyasia, the report added. 2. VALUATION: Last week, UBS analyst Saul Martinez upgraded Bank of America to Buy, while lowering his price target for the shares to $32 from $33. The analyst argued that the current share price offers an attractive entry point for a “leading franchise with proven risk and expense discipline and above peer profitability.” Martinez believes that even with slowing revenue growth, Bank of America should continue improving efficiency metrics, with the company also looking “comparatively well positioned to withstand a turn in credit.” Not as bullish, Macquarie analyst David Konrad downgraded Bank of America to Neutral from Outperform on January 7, based on recent outperformance and its premium valuation. BofA trades at a 10% premium to peers and although he believes some premium is warranted due to its above peer returns and lower credit risk profile, Konrad thinks the premium valuation may be stretched owing to the fewer upcoming catalysts he sees for it. 3. MORGAN STANLEY MAY RAISE TARGETS: Citi analyst Keith Horowitz upgraded Morgan Stanley to Buy from Neutral on Wednesday. Higher market volatility can drive better markets revenue for Morgan Stanley over the course of 2019, Horowitz argued, adding that thinks the company has the potential over the long term to raise its return on tangible equity targets on improved efficiency and lowering capital levels. Back in October, his peer at Wells Fargo had also raised Morgan Stanley’s rating to Outperform from Market Perform. Mike Mayo argued that the company has evolved its business mix more than any other large bank, having increased its wealth and asset management to half of the firm. The analyst sees the bank’s EPS beating consensus by 2020 even assuming only 5% total revenue growth over that period. Further, Mayo expects Morgan Stanley to increase its financial targets in January and believes it should fare better under the next CCAR in June.
previous post