With US bank stocks up in some cases near 20% since the Trump election, Deutsche Bank thinks it is now time to upgrade the banks (although it would have been far more helpful a few weeks ago), in particular issuing a buy rating on Goldman Sachs (NYSE:GS).

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The market environment for banks is looking strong

The November 29 report from bank Research Analyst Matt O’Connor and his team thinks bank stocks are pricing in higher rates and are facing strong macro tailwinds to assist their performance.

Deutsche Bank assumes a rate hike in December, two hikes in 2017, and four in 2018. They forecast higher loan growth, assuming high single-digit loan growth in both 2017 and 2018, up from mid-single digits previously. Most of the increased revenue from interest rate hikes are expected to drop directly to the bank’s bottom line.

A stronger economy, boosted by potential Trump fiscal stimulus, should bode well for bank fee revenues. “In addition to improved loan growth, stronger economic growth will likely result in higher volumes and better fee revenues across the industry,” the report said, pointing to the potential biggest beneficiary being in capital markets.

Given the stronger environment, Deutsche Bank is looking for a “meaningful” increase in dividends and buybacks. They assume 40% dividend payouts starting in 2017, which prices in higher total payout ratios. That said, a degree of capital will be needed to support more balance sheet growth. When interest rates rise, this will be a drag on regulatory capital for the largest banks and GAAP capital/book value for all banks, providing a slight headwind. Looking at the stunning increases in bank stocks since the election – Goldman Sachs is up 20% since then, for instance — the increase in stock prices has been a drag on reducing shares outstanding.

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Goldman Sachs is looking particularly attractive, even after a 20% stock price rise over three weeks

Goldman Sachs, in particular, appears attractive – and not just because the Trump administration appears to be leaning heavily on alumni from the storied Wall Street investment bank for cabinet picks.

The report pointed to strong positioning with revenue upside, effective cost controls all while the stock price is trading below peers despite similar or higher current and expected returns.

“From an expense point of view, Goldman Sachs has made good progress on both comp and non-comp and we see good leverage to incremental revenues,” the report pointed out, noting that operating leverage should benefit from the bank’s product leadership positions which reduces the need to invest heavily in certain divisions as some of their peers may need to do.

In part this can be seen in the expected rollout of a consumer lending platform that the report expected to be additive. Deutsche Bank is expecting momentum to become more apparent in 2018 and could lead to adding $400 million in after credit revenues in 2019.

“Our macro assumptions are for much stronger GDP growth than previously assumed, at least a modest softening in regulation, more global divergence in interest rates, and a general increase in risk taking appetite among investors and companies,” the report said.

The new market environment should benefit many capital market businesses such as advisory, equity capital markets, and both fixed and equity trading – all of which are Goldman Sachs strengths.

Going forward, the impact on debt capital markets is mixed if not uncertain. A stronger economy with correlated higher risk taking is positive for debt markets, but higher rates may slow certain types of debt issuance. Even assuming no changes to the Volcker rule – changes of which are now under consideration, Trump’s newly appointed Treasury Secretary Steven Mnuchin said Wednesday – the market environment “should also provide both more investing and harvesting opportunities for the investing and lending book.”