Goldman Sachs, Jefferies stand out among undervalued big banks, Oppenheimer says

By Steve Gelsi

Analyst recommends GS, JEF, as well as BAC, C, JPM, MS and USB

Oppenheimer analyst Chris Kotowski has reiterated overweight ratings on Goldman Sachs Group Inc. and Jefferies Financial Group Inc. as standouts among a class of relatively cheap big-bank stocks.

"You wouldn't know it from the stock market...but big banks did fine in 2023," Kotowski said in a research note published Tuesday.

He's recommending that investors "in particular" overweight their exposure to Goldman Sachs Group Inc. (GS) and Jefferies (JEF), but the entire group including Bank of America Corp. (BAC), Citigroup Inc. (C), JPMorgan Chase & Co. (JPM), Morgan Stanley (MS) and U.S. Bancorp (USB) "remains significantly undervalued," he said.

The positive note from Oppenheimer came as Morgan Stanley analyst Analyst Betsy Graseck said she is "back & bullish" on big banks.

Also read: Morgan Stanley upgrades Bank of America, Goldman Sachs and Citi on 'lightened up' Basel III capital requirements

Even though the KBW Nasdaq Bank Index BKX fell 4.8% for the year and underperformed the S&P 500 SPX by 29 percentage points, the six largest banks in the U.S. still managed to generate fourth-quarter core earnings of $164 billion, ahead of Oppenheimer's estimate of $146 billion, Kotowski said.

In the fourth quarter, banks disclosed a whopping $194 billion of core pre-provision earnings, which set a record and surpassed Oppenheimer's estimate of $173 billion.

Despite jitters in the market after the collapse of Silicon Valley Bank in March of last year, loan losses for the big six banks were "only" about $2.8 billion higher than expected, he said.

Doubts about net interest income - which is the profit banks make from loans minus the interest they pay out for deposits - did not take place in 2023.

"The fear after SVB's [Silicon Valley Bank's] collapse was that net interest income would collapse," Kotowski said. "This has not happened."

To be sure, some smaller banks struggled, but the largest banks have done well and JPMorgan Chase is "doing best of all," he said.

Looking ahead, Oppenheimer sees net interest income bottoming in the first half of 2024, with loan growth sharply lower but not moving into negative terrtory.

If the pace of fourth-quarter trends in mergers and acquisitions continue, 2024 will see $4.24 trillion in M&A activity, which is above the average of $4 trillion between 2015 and 2019.

"In our view it is a good bet that a resurgence in M&A will pull equity, high yield, and other financing along with it," he said.

Citigroup offers the most value with the greatest potential upside in the group, he said.

For Bank of America and U.S. Bancorp, Oppenheimer expects a benefit in the stocks from being undervalued. The valuation gap in these two names will close "in the normal course of producing the kinds of returns they have over the past decade or so," Kotowski said.

He sees the most upside potential in Goldman Sachs's earnings estimates, which are based on a "relatively depressed" investment banking environment.

Also read: Bank complaints about higher capital requirements may be overblown, finance professor says

-Steve Gelsi

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01-31-24 0805ET

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