‘The Math Just Doesn’t Work’ – Analyst Hits JPMorgan Chase and Goldman Sachs With Downgrade, Says Downside Risk Not Factored In

HSBC is detailing its major downgrade of JPMorgan Chase, Goldman Sachs and Bank of America.

On Tuesday, HSBC dropped its recommendation on JPMorgan (JPM) and Goldman Sachs (GS) from hold to reduce.

The firm also downgraded the recommendation on Bank of America from buy to hold.

In an interview, HSBC’s head of US financials research, Saul Martinez, says the banks have solid fundamentals, but their valuations raise concerns.

“We were not adopting a more negative view of operating fundamentals. We still think that net interest income is on the right track. You know, you are seeing some growth there.

Obviously, there are some nuances to each of the downgrades, JPMorgan, Goldman to reduce and Bank of America to hold, but at a high level, it’s valuation. Pricing is not factoring in downside risk and the dilutive impact of buybacks at much higher multiples.”

Martinez says he was not convinced that JPMorgan deserves its price.

“In JPMorgan’s case, I think the math just doesn’t work at these valuations. The stock, so with banks, you look at price to tangible book value multiples and return on tangible common equity. Higher ROTC (return on tangible common equity), higher price to tangible. JPMorgan is trading close to three times tangible. That is a very elevated multiple.”

He says it’s a similar case for Goldman Sachs.

“We feel like we’re swimming against the tide with Goldman a little bit because the investment banking landscape is good.

The risk-reward is very skewed here. We think good news is priced in, but again, if the market cools off and IB (investment banking) activity doesn’t really move forward, we don’t get a super cycle in IB activity, I think there’s more room for disappointment here than for upside.”

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