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Big Bank Stocks Have Plenty of Upside for 2014, Says Jefferies

NEW YORK ( TheStreet) -- Investors may be wondering whether or not to consider buying stocks in the largest U.S. banks, considering the sector's world-beating performance over the past two years, but stocks of the biggest banks are still relatively cheap, and the group is "levered to both domestic and international economic recovery and expansion," according to Jefferies analyst Ken Usdin.

When TheStreet last Friday looked at year-end bank stock valuations relative to consensus 2015 earnings estimates for all U.S. bank stocks, using data provided by Thomson Reuters Bank Insight, Bank of America (BAC - Get Report) had the ninth lowest forward price-to-earnings ratio, with JPMorgan Chase (JPM) and Citigroup (C - Get Report) among the five cheapest banking names on this basis.

Here's a quick summary of performance and valuations for these three banks:

  • Shares of Bank of America closed at $16.50 Tuesday.  The shares have already risen 6% during the new year, following a 34.5% return last year and a 110% return during 2012.  The shares trade for 1.2 times their reported Sept. 30 tangible book value of $13.62, and for 10.4 times the consensus 2015 earnings estimate of $1.59 a share, among analysts polled by Thomson Reuters.  The consensus 2014 EPS estimate is $1.32.
  • JPMorgan closed at $58.32 Tuesday.  The shares returned 37% during 2013, following a 36% return during 2012.  The shares trade for 1.5 times their reported Sept. 30 tangible book value of $39.51, and for 9.2 times the consensus 2015 EPS estimate of $6.35.  The consensus 2014 EPS estimate is $5.99.  Based on a quarterly payout of 38 cents, the shares have a 2.61% dividend yield.
  • Citigroup on Tuesday closed at $54.22.  The shares are up 4% for the new year, after returning 32% during 2013 and 51% during 2012.  The shares trade just below their reported Sept. 30 tangible book value of $54.22, and for 9.2 times the consensus 2015 EPS estimate of $5.92.  The consensus 2014 EPS estimate is $5.30.
Usdin on Wednesday initiated his firm's coverage of Bank of America, JPMorgan and Citigroup. 

Bank of America

Usdin rates Bank of America a "buy," with a price target of $19, implying 15% upside for the shares over the next 12 months.  The company's "aggressive stance" in setting aside reserves for mortgage repurchase demands from investors has "put significant risks behind," according to the analyst.  With major lawsuits from American International Group and the Federal Housing Finance Agency (the regulator of Fannie Mae (FNMA) and Freddie Mac (FMCC)), Usdin forecasts another $6 billion in litigation expenses during 2014 and 2015.

The Federal Reserve's annual stress tests for the largest financial companies, followed by reviews of the companies' plans for the deployment of excess capital, has placed a major regulatory burden on the big banks, but has also turned late March into "the gift getting season" for investors.  Following last year's stress tests, Bank of America left its quarterly dividend at a penny a share, but received the Fed's approval for up to $5.0 billion i common-share buybacks and $5.5 billion in repurchases of preferred stock, through the first quarter of 2014.  Usdin expects $5 billion to $6 billion in repurchases of common shares from the second quarter of 2014 through the first quarter of 2015, along with an increase in the dividend to 5 cents a share during the second quarter.  "Regulatory capital accretion should continue at a rapid clip as the bank utilizes deferred tax assets (DTAs), making it likely that BAC's capital payout could accelerate in '15," he wrote.

Usdin's price target for Bank of America is based on a multiple of 11.5 times his 2015 EPS estimate of $1.65.  He is also ahead of the consensus with a 2014 EPS estimate of $1.35.

"Over the past few years, BAC has made significant strides to de-risk the balance sheet, fortify capital levels, reduce costs, and improve earnings visibility. It has carved a clear path to future earnings growth, efficiency improvement, and improving returns," Usdin wrote.

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