By Philip van Doorn

Shares of Bank of America (BAC) look quite pricey, even when compared to better- performing megabanks.

Credit Suisse analyst Moshe Orenbuch on Wednesday downgraded Bank of America to a neutral rating from an "outperform," even though he raised his price target for the shares by a dollar to $12. 

The analyst says the stock's "current valuation appears to be ahead of the company's near- to intermediate-term performance and appears to be discounting significantly faster improvements in efficiency than we would be expecting. At its current valuation, the shares appear to be discounting at least a 16% improvement in costs over the next year vs. our estimate of 10%."

Bank of America's shares certainly appear expensive to forward earnings when compared to other U.S. banking giants. The shares closed at $11.98 Tuesday, trading for 0.9 times their reported Sept. 30 tangible book value, and for 12.4 times the consensus 2013 earnings estimate of 97 cents, among analysts polled by Thomson Reuters. The consensus 2014 earnings per share (EPS) estimate is $1.27. 

Here's how the valuation compares with the company's largest competitors:

• Shares of Citigroup (C) closed at $42.46 Tuesday, trading for 0.8 times their reported Sept. 30 tangible book value, and for 9.1 times the consensus 2013 EPS estimate of $4.67. The consensus 2014 EPS estimate is $5.16.
• Shares of JPMorgan Chase (JPM) closed at $45.50 Tuesday and traded for 1.2 times tangible book value, according to Thomson Reuters Bank Insight, and for 8.6 times the consensus 2013 EPS estimate of $5.31. The consensus 2014 EPS estimate is $5.70.
• Wells Fargo (WFC) closed at $34.71 Tuesday, trading for 1.7 times tangible book value, and for 9.6 times the consensus 2013 EPS estimate of $3.62. The consensus 2014 EPS estimate is $3.86.
• Shares of U.S. Bancorp (USB) closed at $32.97 Tuesday, trading for 2.6 times tangible book value, and for 10.7 times the consensus 2013 EPS estimate of $3.08. The consensus 2014 EPS estimate is $3.31.

With the exception of Citigroup, which is going through its own cleanup process, the other banks above have all been posting much stronger earnings than Bank of America, while trading much lower to earnings estimates. According to Thomson Reuters Bank Insight, Bank of America's return on average tangible common equity for the past four quarters through September was 3.50%, compared to 4.89% for Citigroup, 14.03% for JPMorgan Chase, 16.11% for Wells Fargo, and a very strong 21.60% for U.S. Bancorp.

Bank of America will report its fourth-quarter results on Jan. 17. The company announced on Monday that it expected its fourth-quarter earnings to be "modestly positive," as a result of its mortgage putback settlement with Fannie Mae (FNMA) and because of its participation in an $8.5 billion mortgage foreclosure settlement with federal regulators.

The company on Monday also announced that Fannie Mae, Freddie Mac and Ginnie Mae had agreed to allow the company to sell servicing rights on 2 million residential mortgage loans, with an unpaid balance of $306 billion.

Getting back to the 16% annual decline in expenses that Orenbuch says is currently priced into Bank of America's shares, the analyst said that "despite the announced mortgage servicing sales, it will take until 2014 for the annual run-rate of expense saves. Separately, we think it will be hard for Bank of America to grow revenues faster than the 'average' bank."

Orenbuch did say that "If BAC is able to get an additional 5 percentage point improvement in the efficiency ratio, this would correspond to $0.30 in EPS, and over 200 bps in [return on tangible equity]," which would be "sufficient to have the shares be attractive at current levels."

"However, this represents about 40% of Legacy Assets & Servicing costs, which will likely take through 2015 to achieve that level of reduction," he said, making Bank of America a longer-term expense savings play.

The efficiency ratio is, essentially, the number of pennies of expenses a bank incurs for each dollar of revenue. Bank of America's third-quarter efficiency ratio was 81.32%, according to Thomson Reuters Bank Insight.

Orenbuch estimates that Bank of America will earn $1.08 a share in 2013, with EPS increasing to $1.40 in 2014.

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