Goldman Sachs' financial sector analysts said in a note to clients that bank stock performance is expected to "shift back to fundamentals" following strong gains in 2012. Many of the worst-performing bank stocks of 2011 were top performers last year. Financial services stocks were the strongest performers among the 10 sector groups in the S&P 500 in 2012, advancing an average 26 percent — twice the gain for the S&P 500 — as banks continued their restructuring efforts after the recession.
For 2013, Goldman Sachs analysts favor banks that still have room to improve their financial performance through restructuring. Banks that have already completed major restructuring will have less opportunity.
"As revenue pressure from low (interest) rates and subdued activity will impact all banks in 2013, stronger banks that have already taken share and reduced funding costs and expenses will have fewer levers to grow earnings per share," the analysts said.
The analysts said Citigroup Inc. and Regions Financial Corp. exemplify banks that remain in the early stages of restructuring, and thus offer strong growth potential. Goldman Sachs upgraded Citigroup to a conviction list "Buy," versus its prior "Buy" rating. The analysts also reiterated their conviction list "Buy" rating on Regions Financial.
The analysts also upgraded SunTrust Banks Inc. to a "Buy" rating from "Neutral," saying it was well-positioned to benefit from the recovery in the housing market, especially in the bank's core market in the South.
The analysts said those three banks "have navigated the cycle most successfully so far," and thus will have "fewer levers to grow earnings in a tough revenue environment."
In midday trading, Citigroup shares gained 61 cents, or 1.5 percent, to $42, while Regions Financial added 14 cents, or 1.9 percent, to $7.47. SunTrust shares added 41 cents, or 1.4 percent, to $29.04.
Among the stocks that had ratings cut by Goldman Sachs, Wells Fargo lost 16 cents, or 0.5 percent, to $34.60, and BB&T slipped 3 cents, or 0.1 percent, to $29.89. Shares of JPMorgan Chase rose 28 cents, or 0.6 percent, to $44.85.