SerpApi.Org
Robust first-half earnings from Morgan Stanley and Goldman Sachs last week have triggered earnings and recommendation upgrades from research analysts as they say Wall Street’s success may be shared by rivals in Europe as well.
HSBC’s U.S. financial research team, led by Saul Martinez, lifted their earnings forecasts for Morgan Stanley and Goldman Sachs in a note dispatched to clients late on Tuesday. HSBC raised its earnings-per-share forecast for Goldman by as much as 25%, lifted the price target from $834 to $995, raised the rating on the stock from reduce to hold.
Martinez noted that Goldman now trades on just 13 times 2027 earnings, its multiple having compressed from 15 times before the second-quarter release. While keeping its call on Morgan Stanley as a hold, Martinez raised its earnings forecasts as the target price was adjusted from $190 to $215.
The drivers of these more optimistic growth assumptions were strong performances from the respective equity divisions but also promising signs from investment banking and wealth management. Returns on equity for both banks hover around the 20% level, roughly in line with the index
Kian Abouhossein, co-head of global bank research at JPMorgan, shares much of the enthusiasm of his peers at HSBC. He published a note Wednesday on the subject of global investment banks and also observed how the U.S. investment banks’ second quarter had far exceeded his own already-constructive expectations.
Abouhossein remarked that while the price-earnings multiple of the U.S. banks are higher, they have been driven by consistent upward earnings revisions. The sector as a whole, the report highlights, saw revenues rise 38% year over year.
Like HSBC, though, Abouhossein thinks many of the positive trends detected in the U.S. are applicable in Europe too. European banks may not receive quite the same impetus from mega IPOs and the AI capex bonanza as their U.S. counterparts but this is reflected in the significantly lower valuations attached to them. UBS trades on 12 times earnings with Deutsche Bank and Barclays on just 8 times.
Abouhossein reads across from the strength demonstrated in Asian markets by U.S. banks to infer something similar from the likes of HSBC and Standard Chartered but while he expects solid earnings momentum for European banks in the looming releases, he believes the buy-side has already factored much of this in after the U.S. showing.
Nonetheless, JPMorgan sees an opportunity for both Barclays and UBS to surprise consensus to the upside.
In terms of longer-term trends Abouhossein argues that investment banking generally is transforming as a business model from a heavy emphasis on balance sheet and inventory, to something lighter and more geared to best-execution practices.
Much of this will stem from technological improvements and innovation, the implementation of blockchain for faster settlement and the adoption of AI for efficiency and productivity.
The EURO STOXX Banks Index has gained ground since Goldman reported results, while the U.S. heavyweights have declined in value after their reports.