This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Buy Big Bank Stocks and Give Regionals a 'Breather': Merrill Lynch (Update 2)

Updated with comments on JPMorgan Chase from KBW analyst Frederick Cannon and Stifel Nicolaus analyst Christopher Mutascio, and also to correct the date of Citigroup's earnings announcement. Citi will report its third-quarter results next Monday, Oct. 15.

NEW YORK ( TheStreet) -- The apparent housing recovery may finally turn investor sentiment to undervalued money center banks and away from a couple of high-flying regional names.

While portfolio managers are "gravitating towards 'housing sensitive' stocks - benefitting regional banks," Bank of America Merrill Lynch analyst Erika Penala said on Tuesday that "money center bank stocks... will be bigger incremental beneficiaries to this theme."

Penala reinstated her firm's coverage of Citigroup (C - Get Report) and JPMorgan Chase (JPM - Get Report) with "Buy" ratings, while downgrading U.S. Bancorp (USB - Get Report) and Fifth Third Bancorp (USB - Get Report), which have both had much stronger recent earnings performance than Citi or JPM.

Among the 24 components of the KBW Bank Index (I:BKX), Citigroup and JPMorgan have the cheapest valuations to consensus 2013 earnings estimates, among analysts polled by Thomson Reuters, while some of the regional names are no longer bargains, but are trading "close to fair values," according to Penala.

The analyst said that "investors are incorrectly overlooking C and JPM on the housing theme, as both EPS power and market multiples are highly levered to a recovery. With consolidated loan loss reserves at 4.4% of loans for C and 3.3% for JPM versus 2% median of the large cap regional banks, the money centers have significantly more room to release reserves," which directly pads earnings results.

Penela also said that the Federal Reserve's next round of annual stress tests "should re-establish money centers as return of capital stories, and give investors confidence that these banks are on a smooth glidepath to Basel 3 compliance." According to BAC Merrill Lynch's analysis, Citigroup could increase its dividend payout from a penny a quarter, to a total annual payout of 60 cents during 2013, while JPMorgan Chase, whose "well-publicized synthetic credit loss had essentially invalidated its 2012 [Federal Reserve] capital return approval," could see its common share buybacks resume during the first quarter of next year.

Finally, the analyst expects capital markets revenue for both firms "could bottom in 2012," setting them up for a major earnings advantage over the regional banks beginning in 2013.

Here's a quick look at all four banks, with their stock and earnings performance, along with additional comment from Penala:
1 of 5

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
C $46.28 0.00%
FITB $18.31 0.00%
JPM $63.20 0.00%
USB $42.69 0.00%
AAPL $93.74 0.00%


Chart of I:DJI
DOW 17,773.64 -57.12 -0.32%
S&P 500 2,065.30 -10.51 -0.51%
NASDAQ 4,775.3580 -29.9330 -0.62%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs