Oppenheimer analyst Chris Kotowski and team argue that banks like Bank of America (BAC), Citigroup (C) and Goldman Sachs (GS) will suffer a number of direct and indirect hits from Brexit–and lower their prices targets accordingly. They explain:
…while 2Q16 estimates should be little impacted by Brexit, it seems likely to us that the uncertainty caused by it will weigh on bank results. While we don’t expect major losses or dislocations for the US banks, we do expect a dragging of earnings from a number of sources…
These impacts in our mind include a marked slowdown in capital spending in the UK and likely Europe in the face of uncertainty about terms of trade and tariffs. This likely also slows M&A, particularly in Europe and the UK. Ditto for new equity issuance. We would also expect FICC trading to slow in the summer after the initial flurry. Finally, it reduces the likelihood of rate increases.
As a result, we are backing out any increases in the net interest margin, and cutting our investment banking and trading revenue assumptions to a small decline in coming quarters rather than a slight increase. Also, at the margin it strikes us that the uncertainty about Brexit will slow the global economy, our own included, and thus we shaved one percentage point off loan growth and added 10% to loss assumptions.
We will admit that these latter assumptions are somewhat arbitrary, but nevertheless we cannot help escape the view that in 2017 everything will likely be at least a little adverse to prior expectations. On average our estimate reductions are 8%, and range from 3% at CIT Group (CIT) to 13% at Goldman Sachs. With that, we are lowering our PT of Bank of America,Citigroup andGoldman Sachs from $20, $70 and $243 to $18, $63 and $214, respectively…
…[We] think that at the margin Brexit will be a negative to earnings on a number of fronts. However, the market has in our mind already over-discounted this. The stocks are trading at a 61% relative P/E which is at the bottom of its historical 60-80% range. We continue to recommend Bank of America, Citigroup, CIT and Goldman Sachs.
Shares of Bank of America have dropped 2.8% to $12.73 at 2:17 p.m. today, while Citigroup has tumbled 3.6% to $40.67, Goldman Sachs has fallen 3% to $144.01, and CIT Group is off 3% at $30.56. The SPDR S&P Bank ETF (KBE) has slumped 3.2% to $29.23.
In the video below, Barron’s Jack Hough and Jack Otter discuss whether all the bad news is already reflected in the stocks of Goldman Sachs, JPMorgan Chase (JPM), and other big financial institutions: