It seems to happen every 12 to 15 years, regardless of what the core reason is, or who is running the government: the banking sector finds a way to hobble Wall Street and more than once has come close to bringing the entire system to its knees. The mortgage implosion in 2007–2008, Long Term Capital Management in 1998, the savings and loan crisis in the 1980s and a host of other incidents can now add regional bank failures in 2023 to the list of implosions.
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Plunging interest rates combined with loan growth is what did in the smartest guys in the room this time. During a historically low interest rate environment, the banks that failed recently had purchased longer term Treasury debt with their deposits, and when interest rates moved higher those bonds had unrealized losses that in many cases could be held in what is called “hold to maturity” category on a balance sheet. That is, until depositors want their money.

An old-fashioned run on the banks like the one seen in the movie “It’s a Wonderful Life” is what brought three institutions to their knees. With depositors clamoring to withdraw their funds, the banks were forced to sell Treasury and mortgage debt that was trading well below where it was purchased, and just like that it was game over.

A new Goldman Sachs research report provides an in-depth look at how the mega-cap banks and money-center leaders are holding up and what expectations look like for the rest of the year and beyond. The good news for investors looking for value is that the rules carved out after the financial crisis in 2008 put the biggest players in much better shape than their smaller bank brethren.

The report said this about the current state of the banking system:

In the near-term, stress remains in the system, as evidenced by recent, negative stock price reactions among regional banks, with concern that weaker equity prices and wider credit spreads could lead to further deposit instability. In our view, the recent price action may lead to regulators looking to bolster confidence in the banking system through either expanding programs such as the Bank Term Funding Program (BTFP – both in term and rate), as well as contemplating the need for some form of expanded deposit guarantee program via the FDIC.

Four top stocks in the financial sector are rated Buy at Goldman Sachs. It is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.

Bank of America

Interest rate increases are welcomed by banks that have their investment book at the proper maturities, and this is one of the biggest in the country. Bank of America Corp. (NYSE: BAC) is a ubiquitous presence in the United States, providing various banking and financial products and services for individual consumers, small and middle-market businesses, institutional investors, corporations and governments in the United States and internationally. It operates 5,100 banking centers, 16,300 ATMs, call centers and online and mobile banking platforms.
Bank of America has expanded into several new U.S. markets, with scale across the country positioning it ideally to benefit from accelerating loan growth over the next two years. Moreover, unlike smaller peers, scale allows the bank to increase investment substantially over the next few years without notably jeopardizing returns, driving further market share gains. Warren Buffett owns a stunning 1.1 billion shares of the bank.
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For the first quarter of 2023, the bank posted net income of $8.2 billion, over a billion more than in the previous quarter. It was a strong quarter by all metrics.

Shareholders receive a 3.18% dividend. Goldman Sachs has a $35 target price on Bank of America stock. The consensus target is $40.43, and shares closed on Monday at $27.69.

JPMorgan Chase

Led by CEO Jamie Dimon, this mega-bank has been the benefactor of the disruption and recent bank failures, and it is a top pick at Goldman Sachs. JPMorgan Chase & Co. (NYSE: JPM) operates as a financial services company worldwide through the following four segments.

The Consumer & Community Banking segment offers deposit, investment and lending products, cash management and payments and services to consumers and small businesses. It also offers mortgage origination and servicing activities, residential mortgages and home equity loans, and credit cards, auto loans, leases and travel services.

The Corporate & Investment Bank segment provides investment banking products and services, including corporate strategy and structure advisory, and equity and debt markets capital-raising services, as well as loan origination and syndication. It offers payments and cross-border financing, as well as cash and derivative instruments, risk management solutions, prime brokerage and research. This segment also offers securities services, including custody, fund accounting and administration, and securities lending products for asset managers, insurance companies and public and private investment funds.

The Commercial Banking segment provides financial solutions, including lending, payments, investment banking and asset management to small and midsized companies, local governments, nonprofit clients and large corporations. It offers commercial real estate banking services to investors, developers and owners of multifamily, office, retail, industrial and affordable housing properties.

And the Asset & Wealth Management segment offers multi-asset investment management solutions in equities, fixed income, alternatives and money market funds to institutional clients and retail investors. It provides retirement products and services, brokerage, custody, estate planning, lending, deposits and investment management products. The company also provides ATM, online and mobile and telephone banking services.
JPMorgan posted exceptionally strong earnings across almost all metrics in the first quarter of 2023. GAAP earnings were better than forecast, though the bank has taken reserves of $1.1 billion for the uncertain macro environment. Revenue beat expectations by a stunning $2.3 billion.

Investors receive a 2.93% dividend. Goldman Sachs has set its target price at $171, while JPMorgan Chase stock has a consensus target of $160.68. Monday’s closing print was $137.07.
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Morgan Stanley

This is another white glove firm that looks to take advantage if the banking system continues to deteriorate. Morgan Stanley (NYSE: MS) is a financial holding company that provides various financial products and services to corporations, governments, financial institutions and individuals in the Americas, Europe, Asia and elsewhere.

Its Institutional Securities segment offers capital raising and financial advisory services, including services related to the underwriting of debt, equity and other securities, as well as advice on mergers and acquisitions, restructurings, real estate and project finance. This segment also provides equity and fixed income products, comprising sales, financing, prime brokerage, and market-making services; foreign exchange and commodities; corporate and commercial real estate loans, commercial mortgage and secured lending facilities and financing for sales and trading customers, and asset-backed and mortgage lending; and wealth management services, investment and research services.

The Wealth Management segment offers financial advisor-led brokerage, custody, administrative and investment advisory services; self-directed brokerage services; financial and wealth planning services; workplace services, including stock plan administration; annuity and insurance products; securities-based lending, residential real estate loans and other lending products; banking; and retirement plan services to individual investors and small to medium-sized businesses and institutions.

The Investment Management segment provides equity, fixed income, alternatives and solutions, and liquidity and overlay services to benefit/defined contribution plans, foundations, endowments, government entities, sovereign wealth funds, insurance companies, third-party fund sponsors, corporations and individuals through institutional and intermediary channels.

Morgan Stanley stock comes with a 3.65% dividend. The Goldman Sachs price target is $104, above the $98.01 consensus target. The closing share price on Monday was $84.43.

Wells Fargo

This is another top pick at Goldman Sachs as was as another big money center bank benefiting from higher net interest income, and it is perhaps the best value play for 2023. Wells Fargo & Co. (NYSE: WFC) is a diversified financial services company that provides banking, investment, mortgage and consumer and commercial finance products and services in the United States and internationally.
The Consumer Banking and Lending segment at Wells Fargo offers diversified financial products and services for consumers and small businesses. Financial products and services include checking and savings accounts, and credit and debit cards, as well as home, auto, personal and small business lending services.
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Its Commercial Banking segment provides financial solutions to private, family-owned and certain public companies. Its products and services include banking and credit products across various industry sectors and municipalities, secured lending and lease products and treasury management services.

The Corporate and Investment Banking segment offers a suite of capital markets, banking and financial products and services to corporate, commercial real estate, government and institutional clients. Products and services include corporate banking, investment banking, treasury management, commercial real estate lending and servicing, equity and fixed income solutions, as well as sales, trading and research capabilities services.

The Wealth and Investment Management segment provides personalized wealth management, brokerage, financial planning, lending, private banking and trust and fiduciary products and services to affluent, high net worth and ultra-high net worth clients.

Wells Fargo beat sales and profit targets in the first quarter, helped along by those higher interest rates. The bank earned $5 billion, or $1.23 per share, in the three months that ended March 31, which beat analyst expectations. Revenue of $20.7 billion topped Wall Street’s target as well and was a strong 17% increase year over year.

The dividend yield here is 3.16%. The $54 Goldman Sachs price target compares with a $48.59 consensus target. Wells Fargo stock closed on Friday at $38.38.

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While avoiding the smaller banks makes sense as there could be another shoe to drop, the sheer massive underweighting of these top companies combined with the big short interest positions means that, like a coiled spring, they could be ready to move higher, and fast, later this year. Despite the strong performance most have posted so far this year, they all still offer outstanding entry points that are way below most of the 52-week highs.

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