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NEW YORK (
JPMorgan Chase(JPM - Get Report) represents the best value in an otherwise overvalued banking sector, according to KBW analyst Chris Mutascio.
Mutascio presented the stock as his best idea for the remainder of 2013 among large-cap banks on Wednesday.
JPMorgan is trading at a 16% discount to the median large-cap bank on a price-to-earnings basis and no longer trades at a premium on a price-to-book basis.
He attributes some of the discount to concerns that JPMorgan might have to raise additional capital to meet new regulatory requirements that mandate a supplementary Basel III Tier 1 leverage ratio of 6% for the largest banks.
JPMorgan will likely have a $15 billion shortfall, according to Mutascio, under the new rules. But the bank, which generated a profit of $21.3 billion last year, should have no trouble generating this capital over time, even if it pays out 50% of its earnings as dividends. The analyst expects the
Federal Reserve to allow banks time to meet the requirements.
JPMorgan also trades at a discount to many regional banks, thanks to a rally in so-called "asset-sensitive" regional banks on expectations that they will benefit the most from the rise in interest rates.
Mutascio believes the recent run-up in these stocks is overdone and somewhat misguided.
"The typical asset-sensitive bank may not be as levered to the way the yield curve is steepening because it is not occurring in a parallel shift fashion. Rather, short-term rates seem to be anchored at very low levels by the Fed for a prolonged period of time," says Mutascio.
The analyst argues that banks are much more levered to the short-term and as a result will not benefit as much from the rise in just long-term rates.
Banks that are poised to benefit in this environment, in the analyst's view, are those that have a lot of liquidity and a securities portfolio with a short maturity schedule. JPMorgan is well placed on both counts, with cash equivalents amounting to 16% of total assets and a securities portfolio that has a shorter duration than most peers.