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Bank of America Is the 'Top Sector Pick'

Stocks in this article: BAC JPM WFC C I:BKX

NEW YORK ( TheStreet) -- Bank of America (BAC) is primed to outperform other large-cap U.S. banks because of continued cost cuts, loads of excess capital, increasing share buybacks and an improving market share, according to Atlantic Equities analyst Richard Staite.

Staite rates Bank of America "overweight," with a price target of $18, implying 19% upside for the shares over the next 12 months.  The company's shares have risen 30% this year through Wednesday's close at $15.14, which compares to a 29% rise for the KBW Bank Index (I:BKX) and exceeds the performance of "big four" bank peers, assuming dividends are not reinvested.

In a note to clients on Thursday, Staite wrote that Bank of America "has started to rebuild market share, costs are set to
drop by a further $9bn, the 2014 share buy back might exceed JPM's and it is a good play on the a recovering US economy, higher house prices, stronger employment and higher interest rates."

That's quite a list of factors playing in Bank of America's favor, which might explain why the shares trade at a higher forward price-to-earnings multiple than peers.  Here's a quick look at valuations, performance and dividend yields for the "big four" U.S. banks:

  • Bank of America's shares closed at $15.14 Wednesday.  The shares trade for 1.1 times tangible book value, according to Thomson Reuters Bank Insight, and for 11.3 times the consensus 2014 earnings estimate of $1.34 a share, among analysts polled by Thomson Reuters.  The consensus 2015 EPS estimate is $1.60.  The company's return on average common equity for the first three quarters of 2013 was 7.44%.  Over the past three full years, the company's ROTCE improved to 2.96% in 2012 from a negative 1.75% in 2010.  Bank of America's quarterly dividend is still just a penny a share.
  • Shares of JPMorgan Chase (JPM) closed at $56.10 Wednesday, returning 31% this year.  The shares trade for 1.4 times tangible book value and 9.3 times the consensus 2014 EPS estimate of $6.02.  The consensus 2015 EPS estimate is $6.38.  JPMorgan's ROTCE for the first three quarters of 2013 was 11.59%, despite the third-quarter net loss resulting from $9.15 billion in provisions for litigation reserves, in advance of the over $17 billion in mortgage settlements with government authorities and investors during the fourth quarter.  Over the previous three full years, the company's ROTCE ranged from 14.72% to 15.26%.  Based on a 38-cent quarterly payout, the shares have a dividend yield of 2.71%.  Considering the relatively low valuation for the shares, the company's long-term profitability and the likelihood that the bulk of its mortgage risk is behind it, one could make a strong case that JPMorgan is a screaming buy right now. 
  • Wells Fargo (WFC) closed at $43.62 Wednesday.  The shares have returned 31% this year and trade for 1.9 times tangible book value and 10.9 times the consensus 2014 EPS estimate of $4.01.  The consensus 2015 EPS estimate is $4.24.  The company continues to be the earnings leader among the big four, with an ROTCE for the first three quarters of 2013 of 17.86%, following a steady improvement to 16.70% in 2012 from 14.77% in 2010.
  • Citigroup closed at $50.77 Wednesday, for a year-to-date return of 28%.  The shares trade for 0.9 times tangible book value and for 9.3 times the consensus 2014 EPS estimate of $5.43.  The consensus 2015 EPS estimate is $5.98%.  Citi continues to pay a quarterly dividend of a penny a share.  The company's ROTCE for the first three quarters of 2013 was 8.95%.  Over the previous three years, Citi's ROTCE ranged from 4.80% to 8.04%.

Staite's market share comment centered around Bank of America's 19% year-over-year growth in commercial loans during the third quarter, a 36% increase in trading revenue and over 1 million in new credit card accounts from a year earlier.

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