In addition to bank of America, Juneja has "Overweight" ratings on the following large-cap banks:
- Wells Fargo (WFC), with a price target of $41, implying 23% upside from Thursday's closing price of $33.26. Juneja lowered his price target for Wells Fargo by a dollar, "reflecting our modestly lower earnings forecast" of $3.65 for 2013. The analyst estimates the company will earn $3.95 a share in 2014.
- U.S. Bancorp (USB), with a price target of $39.50, implying 25% upside from Thursday's closing price of $31.54. Juneja lowered the price target from $41, to reflect "lower EPS estimates and based on a P/E multiple of 11.8x versus the peer group multiple of 10.3x." U.S. Bancorp's premium valuation reflects its very strong earnings performance relative to other large-cap U.S. banks, with operating returns on average assets (ROA) ranging from 1.58% to 1.71% over the past five quarters, according to Thomson Reuters Bank Insight.
- SunTrust (STI), with a price target of $32.50, implying 19% upside from Thursday's closing price of $27.20. The analyst cut his price target by a dollar, "reflecting our lower EPS estimates and based on 1.2x our YE 2013 tangible book value versus the peer group multiple of 1.5x because of its lower profitability level."
- PNC Financial Services Group (PNC), with a price target of $72.50, implying 28% upside from Thursday's closing price of $56.54. Juneja lowered his price target for PNC from $80, because of a "lower earnings forecast due to increased pressure on net interest margins."
Discounts to Book Value
Of the nine large-cap universal and regional banks covered in Juneja's report, only three were still trading at discounts to tangible book value, including Bank of America, at 0.8 times their reported Sept. 30 tangible book value of $13.48; Citigroup, at 0.7 times their reported tangible book value of $52.70; and with KeyCorp (KEY), at 0.9 times their reported tangible book value of $9.54, based on Thursday's closing price of $8.14.
Even though he is expecting Bank of America's shares to return 23% over the next year, Juneja estimates the shares will still trade for just 0.9 times tangible book value at the end of 2013, or a "40% discount to expected peer median tangible book value multiple of 1.5x." The analyst expects "BAC to trade at a discount near term due to continued headline risk and some pressure on revenues."
The Margin Squeeze
Among the nine large-cap banks covered in Juneja's report, the analyst expects all except Bank of America to see at least a modest decline in net interest margin during 2013.
The net interest margins is the difference between a bank's average yield on loans and investments, and its average cost for deposits and borrowings. The Federal Reserve has kept its target short-term federal funds rate in a range of zero to 0.25% since the end of 2008. On Wednesday, the Federal Reserve Open Market Committee announced that it would continue to purchase $40 billion in mortgage backed securities each month, while initially continuing its monthly purchases of $45 billion in long-term U.S. Treasury securities in 2013, while no longer "sterilizing" the long-term Treasury purchases by selling equivalent amounts of short-term Treasury paper.
So most banks will be feeling the squeeze, since they have already enjoyed most of the benefit of the decline in deposit rates, while the loans and securities they invest in continue to reprice at lower rates.According to Juneja's data, all but three of the large-cap banks saw their net interest margins decline during the third quarter from the second quarter, with PNC seeing the largest margin decline of 26 basis points, followed by Wells Fargo, with a decline of 25 basis points. But these two banks will still have relatively high net interest margins according to Juneja, who estimates margins of 3.78% for PNC and 3.61% for Wells Fargo, with PNC's margin only exceeded by BB&T (BBT), with an estimated fourth-quarter net interest margin of 3.80%.
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