MW Bank of America upgraded to buy ahead of Trump's return to the White House
By Steve Gelsi and Philip van Doorn
Citi analyst Keith Horowitz expects differences in bank-stock metrics to flatten as the sector benefits from lower taxes and lighter regulation under the second Trump administration
$Bank of America Corp(BAC-N)$. drew an upgrade to buy from neutral from Citi Research on Friday as analyst Keith Horowitz said he expected wider differences in bank stock valuations to flatten out in a post-election stock market.
Horowitz's upgrade focuses on the expected path for Bank of America $(BAC.SI)$ to achieve normalized returns on equity and assets of 15% and 1.2%, respectively.
For JPMorgan Chase $(JPM)$ Horowitz expects a higher normalized return on tangible common equity $(ROE)$ of 17%, and a matching normalized return on assets (ROA) of 1.2%
Bank of America's stock rose 1% in premarket trading on Friday. Including a big boost on the day after the presidential election, the stock is now up about 33% in 2024, while JPMorgan Chase's stock has rallied about 39%.
Citi analyst Horowitz said Bank of America stands out as the best liquid way to play an expected "convergence" among bank stocks, compared with the current situation of "relatively wide" valuation spread between the "haves and have nots" in the sector.
Along with Bank of America, Horowitz said other beneficiaries of this expected trend include buy-rated Regions Financial Corp. $(RF)$, Citizens Financial Group Inc. (CFG), $Capital One Financial Corp(COF-N)$. $(COF)$, Huntington Bancshares Inc. $(HBAN)$, M&T Bank Corp. $(MTB)$, PNC Financial Services Group Inc. $(PNC)$ and Ally Financial Inc. (ALLY).
Horowitz compared the moves in bank stocks after Donald Trump was elected in 2016 to the current banking environment heading into his second term.
He expects the maximum corporate income-tax rate to be lowered to 15% from 21%, which he said would translate to a roughly 8% benefit in earnings per share for the banking industry.
He expects Trump to take a lighter approach to bank regulations on capital requirements and other measures, which would ease the risk to fee revenue streams such as late fees - both of which would benefit Bank of America.
However, during Trump's first term, rates were near zero, which stoked greater loan activity. While rates are expected to come down, they won't return to those historically low levels.
"While there is some optimism on loan growth, we do not expect to see a material lift in loan growth relative to prior expectations and note that spreads are likely to remain thin," Horowitz said.
A quick look at stock valuations further underscores why Bank of America's stock might be the better buy at this point. And even JPMorgan Chase's chief financial officer Jeremy Barnum might agree, based on his comments during that bank's earnings conference call on Oct. 11.
Barnum said that "buying stock back at more than two times tangible book value is not necessarily the best thing to do, because we think we'll have better opportunities to redeploy it or to buy back at cheaper prices at one point."
As of Thursday's close, Bank of America's stock traded for 1.7 times tangible book value, compared with its five-year average price/tangible book ratio of 1.59, according to FactSet. Meanwhile, JPMorgan Chase's price/tangible book ratio was 2.48 and compared with a five-year average valuation of 2.04%.
-Steve Gelsi -Philip van Doorn
This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
November 08, 2024 08:31 ET (13:31 GMT)
Copyright (c) 2024 Dow Jones & Company, Inc.
Comments