HSBC Downgrades JPMorgan Chase, Goldman Sachs on Valuation Concerns

HSBC has recently adjusted its recommendations for several prominent U.S. banks, expressing concerns over their current valuations and potential downside risks. The firm downgraded JPMorgan Chase and Goldman Sachs from "hold" to "reduce," while Bank of America's recommendation was changed from "buy" to "hold."

Saul Martinez, HSBC’s head of U.S. financials research, clarified that the downgrades are not due to a negative outlook on the banks' operating fundamentals. He noted that net interest income is showing growth, but the market's pricing does not adequately reflect potential downside risks or the dilutive impact of buybacks at higher multiples. Martinez believes that the current valuations of these banks do not justify their prices, particularly for JPMorgan Chase, which is trading at a very high multiple of its tangible book value.

Martinez highlighted that JPMorgan Chase's price-to-tangible book value multiple is close to three times, which he considers an elevated level. He also emphasized that the return on tangible common equity (ROTC) is a crucial metric for evaluating banks, and at current valuations, JPMorgan's ROTC does not support its stock price. Similarly, Martinez expressed concerns about Goldman Sachs, noting that while the investment banking landscape is currently favorable, the risk-reward profile is skewed. He warned that if the market cools off and investment banking activity does not continue to grow, there could be more room for disappointment than for upside gains.

Martinez's analysis suggests that the market may be overly optimistic about the future performance of these banks, and that their current valuations do not fully account for potential risks. He advised investors to be cautious and consider the potential downside risks before making investment decisions.