We have two tier-1 firms out with pretty significant calls in the fins:
– Merrill Lynch/BAC is downgrading Goldman Sachs (NYSE:GS) and Citigroup (NYSE:C) to Neutral from Buy.
Common denominator: expected weakness in Q1:11 results. Results unlikely to be dismal, and should show improvement over Q4, but they don’t expect seasonal improvement as strong as often seen in the past. Client engagement remains subdued, Mid-East turmoil likely only to further reduce customer risk appetite. Thus Merrill is making significant cuts to theri forecasts, and expect consensus to decline over the coming weeks.
Increasingly, the firm believes investors will look to the theme of improving cash flow/ return of capital via dividends/ buybacks, and also to play financials that are less– or even positively – affected by restrictions on banks such as Volcker Rules. In Merrills coverage, this includes names such as BX and KKR, as well as LAZ. This, together with low valuation relative to current earnings, drives keeping JPM “Buy”.
GS: Cut 1QE to $3.91 from $5.39, implies 13% ROE. YoY comps challenging, but they see trading improvement vs. weak 4Q. IB weaker vs. robust
Though conditions could improve at any time, it has historically been true most years that Q1 sets the bar for the year’s ROE, and if Q1 is disappointing, it may keep the stock treading water until ROE potential clearly improves. Also, in the wake of some global peers recently reducing ROE targets, it seems possible that GS might reduce its traditional 20% ROTE goal given the increase in regulatory capital mandates.
GS tgt is lowered to $174 from $182.
– Morgan Stanley is out very positive on Large Cap Banks: Expect Significant Declines in Card NCOs; Upgrading COF.
Investment conclusion: They expect very significant declines in credit card charge-off rates, normalizing at a median 4.5% in 2012 vs. MSCO’s previous estimate of 5.9%. Early stage roll rates down more sharply than expected, coupled with faster than expected jobless claims declines drive their lower loss estimates. The firm is taking up their estimates for AXP, BAC, C, COF, DFS, and JPM as a result, and upgrading COF to Overweight. They expect COF to be a primary beneficiary of lower charge-offs and loan growth, and view the current valuation (trading at 9x our 2012 EPSe) as an attractive entry point.
Upgrading COF to Overweight: Morgan Stanley is upgrading COF to Overweight with a $60 price target (22% upside vs current levels). They expect COF to be a big winner as charge-offs decline substantially vs current levels and loan growth picks up in 2011-2012. Firm’s price target triangulates to 11x their 2012e EPS, vs COF’s historical median of 13x.
Notablecalls: Merrill’s GS downgrade is surely the more out-of-consensus one of the two and hence gets my vote. More of a sentiment trade, if you will.
On the other hand, COF almost always moves on rating changes. With the rating coming from Morgan Stanley one would expect a 2-3% move putting $50-50.50 range in play.
Neither of the calls feels very urgent so no need to overpay in the pre market.