Citigroup upgrades Goldman Sachs, sees the brokers doing better with the Fed keeping rates low

Published Mon, Dec 16 20198:30 AM ESTUpdated Mon, Dec 16 20194:00 PM EST

Goldman Sachs and the other brokers are in a better position than other banks with the Federal Reserve committed to keeping short-term interest rates low, according to Citigroup. The firm upgraded shares of Goldman Sachs to buy from neutral and hiked its price target to $255 per share from $220 per share, more than 13% upside for the bank stock. Goldman Sachs closed at $225 per share on Friday. Citigroup also has a buy rating on Morgan Stanley. "We see favorable risk/reward at the brokers given their lack of interest rate and credit risk, and would likely instead see earnings upside if an accommodative Fed spurs capital markets activity," said Citi analyst Keith Horowitz in a note to clients on Monday. The Federal Reserve cut interest rates three times this year as a U.S.-China trade war and slowing global growth threatened the U.S. economy's decade long expansion. While the lower short term interest rates can negatively effect big banks earnings if they are paying out deposit rates at a higher level than market rates, Horowitz said Goldman is safer from the interest rate and credit risk than other banks. Shares of Goldman Sachs are up nearly 35% this year, and Citigroup said the bank could even get a boost from the strong U.S. consumer and tight labor market as Americans are more confident about spending. Horowitz said he sees a path for Goldman to increase returns more than 13%, "through positive operating leverage, efficiency gains, business mix, improving funding costs, and capital return." Citigroup said it likes banks like Goldman Sachs and Morgan Stanley, who have upside without needing higher rates and have limited downside risk. "With GS already trading at tangible book value, we see limited downside, and would prefer to add exposure to names with the potential for [return on total equity] improvement without the benefit of rates," said Horowitz. Shares of Goldman Sachs rose 1.3% on Monday. Horowitz also upgraded shares of Citizens Financial , Northern Trust , Regions Financial and U.S. Bancorp to neutral to sell. — with reporting from CNBC's Michael Bloom.

Brendan McDermid | Reuters

Goldman Sachs and the other brokers are in a better position than other banks with the Federal Reserve committed to keeping short-term interest rates low, according to Citigroup.

The firm upgraded shares of Goldman Sachs to buy from neutral and hiked its price target to $255 per share from $220 per share, more than 13% upside for the bank stock. Goldman Sachs closed at $225 per share on Friday.

Citigroup also has a buy rating on Morgan Stanley.

"We see favorable risk/reward at the brokers given their lack of interest rate and credit risk, and would likely instead see earnings upside if an accommodative Fed spurs capital markets activity," said Citi analyst Keith Horowitz in a note to clients on Monday.