Goldman Sachs draws outperform rating from Daiwa on expected recovery in investment banking

By Steve Gelsi

Analyst Kazuya Nishimura says Goldman may offer the strongest profit growth potential among major banks

Goldman Sachs Group Inc. was upgraded to outperform from neutral on Thursday at Daiwa Capital Markets on bullish expectations for the bank's Wall Street deal-making.

Analyst Kazuya Nishimura said he's optimistic about the prospects for major U.S. banks in general, but he singled out Goldman Sachs (GS) with his only positive ratings change in the group and hiked the stock's price target by $20 to $430 a share.

"It is difficult to predict the pace of recovery in investment banking accurately, but Goldman Sachs looks to have the strongest profit growth potential among major banks when demand improves, and we believe its risk-reward profile is attractive," Nishimura said in a research note.

Given that Goldman Sachs has restructured its consumer operations and recorded impairments for its office real-estate investments, the bank's negative catalysts have "largely played out," he said.

Meanwhile, prospects are improving for a recovery in the investment banking business, which has been in one of its worst downturns in many years on the heels of a quick rise in interest rates in 2022.

Also read: Wall Street's biggest banks are beating investment-banking revenue estimates

"Given the ongoing improvement in demand, we think profit growth [at Goldman] will surpass market expectations thanks to tightened controls on fixed costs," Nishimura said.

Overall, Daiwa Capital Markets remains bullish about big-bank performance in 2024, with prospects for stronger-than-expected net interest income and a potential peak in credit costs.

Other favorable developments include a potential paring back of Basel III endgame capital requirements, rate cuts by the Fed and other central banks, as well as a soft landing in the economy.

Nishimura ranked Goldman Sachs third in its order of preference for major banks: Citigroup Inc. (C), JPMorgan Chase & Co. (JPM), Goldman, Wells Fargo & Co. (WFC), Bank of America Corp. (BAC) and Morgan Stanley (MS).

Citigroup offers "headway with reforms and improving profitability" while JPMorgan has "good prospects for strong earnings."

Wells Fargo is being boosted by the growing expectation that federal regulators may lift an asset cap imposed on the bank, he said.

Bank of America "continues to deliver solid earnings performance but share price catalysts are lacking," he said.

As for Morgan Stanley, long-term growth prospects remain healthy although hopes for improved profits have been pushed back, as Nishimura tracks its earnings improvement in its wealth management unit.

Daiwa Capital Markets currently has buy ratings - its highest mark - on JPMorgan Chase and Citigroup, while Bank of America, Wells Fargo and now Goldman Sachs are rated with its second-highest level, outperform.

Morgan Stanley is still rated as neutral.

Also read: Goldman Sachs could profit as IPO and merger activity ramp up: analyst

-Steve Gelsi

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03-14-24 1218ET

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