Thread: Merideth Whitney Buy the Banks..say what

This morning Ms. Whitney issued her firm's first buy rating on a bank: Goldman Sachs was raised to a buy from a hold with a $186 target. Due to a surge in debt issuance by under-funded states and with Lehman gone, Goldman stands poised to gain market share in debt-related, Buy America, muni, and agency areas in the coming year. She thinks that they can do $4.65 a share in Q2 and close to $20 a share in 2010 and $22.10 in 2011. Her estimates only assume a 16% ROE, so she feels as though there could potentially be more upside to these numbers.

While core numbers may not be so good for most other banks, the below the line numbers for the banks will be huge. Due to a big move higher in tangible book, she has become more positive on bank's core earnings. Looking at the mortgage market, she is expecting to see a "quantum leap" in loan modifications to the order of a 10-fold increase. The government has given the banks $18 Billion in short term incentives (ultimately going to $75 Billion) to encourage loan modifications and she feels that this could be a positive long-term driver for the mortgage servicers.

According to Whitney, Bank of America seems to be the cheapest of the big money center banks relative to tangible book. She is expecting a very big mortgage quarter from BAC and a big move higher in its tangible book value to well in excess of $12 a share this quarter. Issuing a short term trading call here, Whitney seems to think that we could see a 15% move higher in BAC, JPM, and WFC due to a lot of one time events such as the surge in mortgage refinancings in Q2. She feels that the stocks will then flatline and then have another down-leg thereafter.
As for J.P. Morgan, she feels that they will do well on the i-banking side but will be weighed down by a sizeable home equity book and its credit card business. Ultimately, she expects its below the line numbers to do very well.
As for Citigroup, she thinks the biggest issue for them now is dilution and she does not feel as though too many institutions will be too focused on their quarter.

All in all, Ms. Whitney seems to be making a bullish short-term trading call on some of the bigger banks. Longer-term, she feels that there are too many consumer related and high unemployment issues for the economy to be interested in staying involved with any of these banks on a longer term basis, excluding Goldman. Even with the current high-reserve positions of the banks, she is looking for more dilution in the long-term as these banks will need to raise more capital in the future.
Disclosure: The author does not have a position in GS, JPM, BAC, WFC, or C at the time of this writing. The author does expect to buy some short term calls on GS and BAC for catalytic earnings events this week.

Sniff sniff, I smell a rat.