Goldman Sachs analyzes three key issues before the performance of U.S. bank stocks, optimistic about Bank of America, Citigroup, and Wells Fargo

According to the Zhitong Finance APP, the new round of earnings season for U.S. stocks will kick off this month, with bank stocks leading the way. Goldman Sachs stated in a research report released on April 1 that the market currently has doubts about the growth of banks' net interest income (NII), trading income, the recovery of investment banking business, and capital returns. However, the bank expressed optimism about Bank of America (BAC.US), Citigroup (C.US), and Wells Fargo (WFC.US), as these banks have solid fundamentals and significant potential upside in loan growth, fee income, and capital returns.

Goldman Sachs noted that as the earnings season for U.S. bank stocks in the first quarter of 2025 approaches, investors are expected to focus on three key themes:

1. The outlook for net interest income (NII): How much has the NII growth trajectory for 2025 changed since the beginning of the year?

Goldman Sachs stated that due to weak loan growth and a flattening yield curve, it has lowered its NII expectations for 2025E/2026E/2027E, reducing them by 80/130/160 basis points, respectively, compared to the forecasts made after the fourth quarter of 2024 earnings release. The bank indicated that considering the market's forward curve reflects a median forecast of three rate cuts by the Federal Reserve in 2025, it expects a year-on-year NII growth of 5% in 2025, with a year-on-year growth of 1% in the first quarter of 2025 (but a quarter-on-quarter decline of 1%). The bank's NII growth rate forecast for 2025 (excluding Morgan Stanley) is about 70 basis points lower than the market consensus. Despite lowering its NII expectations, the bank does not currently believe that banks will adjust their full-year NII guidance.

2. Uncertainty in the recovery of trading income and investment banking business

Although the trading income environment remains healthy in the short term, there are still questions about whether trading income has peaked, and the recovery path for investment banking business is also uncertain. Goldman Sachs pointed out that banks' guidance for year-on-year growth in trading income for the first quarter of 2025 is in the mid-single digits to low double digits, but given the uncertainty in the macroeconomic environment and the potential for decreased volatility, the risk of slowing trading income growth remains. Additionally, the volume of investment banking business has decreased by about 10% year-on-year since the beginning of the year, raising market concerns about the speed of recovery in mergers and acquisitions and the equity capital markets.

3. Uncertainty regarding the timing and scale of capital returns

Goldman Sachs stated that considering the potential easing of regulatory capital requirements and the fact that large banks held about $70 billion in excess capital as of the fourth quarter of 2024 (compared to current management targets), the bank expects some banks to seek to increase stock buybacks (which would be a positive signal for investors) and gradually raise dividend payout ratios. Goldman Sachs anticipates that capital returns will grow by about 35% year-on-year in 2025, with capital return rates increasing by about 70 basis points year-on-year. The bank believes that after the elections, banks may face lower future capital requirements. However, in the short term, banks may still maintain cautious capital deployment due to reasons including: 1) uncertainty regarding the final outcome and timeline of regulatory reforms; 2) the global systemically important bank (G-SIB) capital requirements for JPMorgan and Bank of America will increase by 50 basis points starting from the fourth quarter of 2024, and if there are no regulatory reforms, this requirement will take effect on January 1, 2027; 3) The Supplementary Leverage Ratio (SLR) imposes constraints at the bank subsidiary level for Bank of America and JP Morgan, as well as at the bank holding company level for Morgan Stanley.

Goldman Sachs has a constructive view on Bank of America, Citigroup, and Wells Fargo. The firm has a "Buy" rating on the stocks of these three banks. Among them, Bank of America is on Goldman Sachs' "Conviction list."

1. Bank of America

Goldman Sachs expresses an optimistic outlook on Bank of America's Net Interest Income (NII) trajectory through 2026, expecting the bank's NII to grow by 6% and 5% year-on-year in 2025 and 2026, respectively, which is about 1-2 percentage points higher than the average of large banks. The driving factors include: 1) Less pressure from short-term interest rates—the future interest rate path indicates limited rate cuts, while Bank of America is sensitive to its asset-liability structure; 2) Strong year-on-year growth in loans and deposits; 3) The repricing of fixed-rate assets has a value-added effect; 4) The repricing of deposits is better than expected; 5) The liability side of global market business NII is sensitive to interest rate changes.

Additionally, Goldman Sachs expects Bank of America to maintain discipline in cost control, creating multi-year operational leverage effects. The firm anticipates that Bank of America's annual expenses will grow by 2-3% year-on-year, but part of this growth will come from increased market share in capital markets. Goldman Sachs also believes that Bank of America's capital returns still have further upside potential, as it may be one of the main beneficiaries of potential capital regulatory reforms.

2. Citigroup

Goldman Sachs believes that Citigroup's strong performance in the fourth quarter of 2024 demonstrates its commitment and execution capabilities, enhancing market confidence in the achievability of its mid-term goals. Citigroup is driving excess growth over the next three years through three major levers, which leads the firm to forecast Citigroup's earnings per share in 2025/2026 to be 1%/4% higher than the Visible Alpha market consensus. The firm adds that Citigroup's Return on Tangible Common Equity (ROTCE) is expected to be around 10.5% in 2026 (at the midpoint of the latest guidance of 10%-11%, about 40 basis points higher than consensus expectations). These factors should drive an increase in Citigroup's stock price, which currently has the lowest price-to-tangible book value (P/TBV) ratio among large banks.

Goldman Sachs points out that these three levers are: 1) A strong 4% compound annual growth rate (CAGR) in revenue, primarily benefiting from growth in service fees and increased market share in capital markets; 2) Efficiency improvements across a range of businesses, saving costs through organizational simplification and reducing stranded costs; 3) Releasing capital through strategic asset divestitures and returning it to shareholders.

Goldman Sachs believes that Citigroup can achieve both revenue growth and cost reduction simultaneously, and has significant capacity to repurchase shares or expand its balance sheet. Given Citigroup's current undervaluation, the firm believes it may be one of the biggest beneficiaries of potential capital regulatory reforms.

3. Wells Fargo

Goldman Sachs reiterates its constructive outlook on Wells Fargo's NII prospects for 2025, citing reasons including: 1) Better-than-expected deposit repricing, with deposit growth helping to replace high-cost financing; 2) Limited rate cuts in 2025, which should benefit Wells Fargo, which is highly sensitive to assets; 3) Securities reinvested in high-yield assets; 4) Growth in NII from market operations.

Goldman Sachs stated that if loan growth accelerates in the second half of 2025 and into 2026, Wells Fargo's NII is expected to grow by 5% year-on-year in 2026. Additionally, Wells Fargo's fee income trajectory is also promising, as the bank's investments in investment banking and trading have yielded results. Goldman Sachs' forecasts for Wells Fargo's core fee income in 2025 and 2026 are 3% and 4% higher than market consensus expectations, respectively.

Furthermore, Goldman Sachs expects that once the asset cap is lifted, Wells Fargo is likely to achieve profit growth in several areas: 1) Reinvesting to regain lost deposit market share and using these funds to support the growth of traditional banking operations (i.e., supporting loans and securities portfolios); 2) Expanding trading operations, particularly in businesses with lower risk-weighted asset (RWA) intensity, such as repurchase agreements, thereby driving overall growth for Wells Fargo in the capital markets; 3) Accelerating savings on special operating costs, as Wells Fargo reduces its investments in risk control and plans to optimize redundant technology systems.