Societe Generale: Buy BofA, don't buy JPMorgan
The research team at the French financial services company rolls out its investment recommendations for the 'Big 4' US banks.
This is a good time to buy shares of Bank of America (BAC) and Citigroup (C), but investors should steer clear of JPMorgan Chase (JPM) and Wells Fargo (WFC) for the time being, according to Societe Generale.
Societe Generale equity analyst Murali Gopal and his research team on Friday initiated their coverage of the "Big Four" U.S. banks.
Gopal rates Bank of America a "buy," with a $17 price target. "BAC is uniquely placed for sustained outperformance -- in the near term significant cost savings, additional reserve releases and a strong capital markets business will be supportive of earnings growth and improvement in [returns on tangible equity]," the analyst wrote in a note to clients. Gopal added that "Over the medium term, as short-term rates rise, the bank's strong retail branch network and core deposit base should boost top-line growth. Societe Generale estimates Bank of America's operating earnings will grow from 1.01 a share this year to $1.37 in 2014 and $1.72 in 2015.
Societe Generale also rates Citigroup a "buy," with a $59 price target. The improvement in housing prices is a good sign for Citi Holdings, which is the company's subsidiary into which noncore assets have been placed to runoff. The rise in home prices "bodes well" for the release of loan loss reserves, which boosts operating earnings, and $6.4 billion of the reserves within Citi Holdings are tied to North American housing, according to Gopal.
"Stronger US taxable earnings will be a larger driver of Deferred Tax Assets (DTA)," recapture, according to the analyst. Citigroup's DTA valuation allowance was roughly $45 billion at the end of the second quarter, and the company's earnings during the first half of 2013 were boosted by $1.3 billion in DTA recapture. Gopal estimates Citi's adjusted EPS will increase from $4.93 in 2013 to $5.64 in 2014 and $6.31 in 2015.
For JPMorgan Chase, Societe Generale's initial rating is a "hold." The company's operating performance should be "steady," however, "Rising investigations, litigation and regulatory scrutiny will take time to resolve, and should keep related costs elevated, but more importantly, curb investor sentiment," according to Gopal. Societe Generale estimates JPM's EPS for 2013 will total $5.88, declining slightly to $5.85 in 2014 and increasing to $6.25 in 2015.
JPMorgan was hit early Thursday with $920 million in fines (TheStreet) from four regulators over the "London Whale" hedge trading debacle in 2012. Later on Thursday, the Consumer Financial Protection Bureau said JPMorgan had already refunded $309 million to customers, with the Office of the Comptroller of the Currency also assessing a $60 million fine, spring from the two regulators' combined investigation of its "illegal credit card practices" (TheStreet).
Gopal also rates Wells Fargo a "hold," citing "near-term headwinds," with "little room for improvement." Wells Fargo for years has been the strongest earnings performer among the "big four," as measured by returns on average assets and equity. But with the leading market share among U.S. mortgage lenders, the bank is facing a significant revenue decline as higher long-term interest rates lead to significantly lower mortgage refinance volume.
"Spread revenues along with mortgage banking comprise roughly two-thirds of the top line," for Wells Fargo, according to Gopal. And with the Federal Reserve likely to keep the short-term federal funds rate in a range of zero to 0.25% for an extended period, the bank could be waiting for years for the parallel rise in rates it needs for a significant boost to net interest margins and net interest income.
JPMorgan continues to be the cheapest on a forward price-to-earnings basis among the big four, despite the company's solid earnings performance over the past several years. JPM reported its third record annual profit of The shares closed at $52.75 Thursday and traded for 8.7 times the consensus 2014 EPS estimate among analysts polled by Thomson Reuters.
The next cheapest among the group is Citigroup, with shares closing at $51.95 Thursday and trading for 9.3 times the consensus 2014 EPS estimate of $5.56.
Bank of America's shares closed at $14.61 Thursday and traded for 10.7 times the consensus 2014 EPS estimate of $1.36. Wells Fargo has a similar valuation, with the shares closing at $42.96 Thursday and trading for 10.7 times the consensus 2014 EPS estimate of $4.01.
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