NEW YORK (
TheStreet) -- Sell-side analysts have overwhelmingly positive outlooks for stocks of the largest U.S. banks, although there has been some difference of opinion recently about
(C - Get Report).
Nomura Securities on Wednesday initiated its coverage for the U.S. brokerage and capital market sector, with a "neutral outlook" for the sector as a whole.
Normura analyst Steven Chubak in a report wrote that universal banks face "considerable regulatory pressure and are more exposed to areas of relative weakness," such as trading and mortgage banking, "but for whom valuations are reasonably attractive." The analyst sees brokers having better growth prospects than the big banks, but trading at "premium valuations."
For Bank of America (BAC - Get Report), Nomura initiated a "buy" rating, with a price target of $19, implying potential upside of 15% from Wednesday's closing price of $16.58. Bank of America's 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.
Nomura estimates Bank of America will earn $1.27 a share in 2014, with EPS rising to $1.51 in 2015.
In support of the $19 price target, Chubak wrote, "Using our 2016 model forecasts as a proxy for normalized earnings, our analysis suggests that BAC can generate a mid-cycle [return on equity] ROE of ~15%." Nomura also expects "significant excess capital generation" of $11 billion during 2014.
According to data supplied by Thomson Reuters Bank Insight, Bank of America's return on tangible common equity for the first three quarters of 2013 was a rather unimpressive 7.44%.
But Bank of America has "the most upside" among the universal banks from a rise in interest rates, according to Chubak. Long-term interest rates have already risen considerably, although they are still low from a longer-term perspective. But most banks need to see a parallel rise in interest rates, which can only happen when the Federal Reserve raises the short-term federal funds rate, which has been locked in a range of zero to 0.25% since late 2008. The Federal Open Market Committee has repeatedly said it was unlikely to raise the federal funds rate at least until the U.S. unemployment rate falls below 6.5%. That may happen sooner than previously expected, since the unemployment rate improved significantly to 7.0% in November from 7.5% in October. The Department of Labor will announce the December unemployment rate on Friday.
Following years of major settlements of mortgage repurchase demands from investors, "the remaining liability does not pose a risk to BAC's capital position, although expenses should remain elevated," Chubak added.
Bank of America trades at a higher forward P/E multiple than its peers, showing that investors agree the company is well positioned to benefit from the continuing economic recovery, with an increasing deployment of capital reducing the share count and raising EPS.
Nomura went with a neutral rating for JPMorgan, with a price target of $61, implying upside from Wednesday's close at $58.87. JPMorgan's shares trade for 1.5 times their reported Sept. 30 tangible book value of $39.51, and for 9.3 times the consensus 2015 EPS estimate of $6.33. The consensus 2014 EPS estimate is $5.97. The shares have a 2.58% dividend yield, based on a quarterly payout of 38 cents.
"We like JPM's earnings profile/mix, but the current capital shortfall should dampen near-term return prospects," the report said. "Pressures in FICC and Mortgage Banking should also limit revenue growth, with few opportunities on the cost side given already best-in-class efficiency ratios."
Nomura also forecasts "mid-cycle ROE potential of ~14% for JPM."
JPMorgan's return on tangible common equity for the first three quarters of 2013 was 11.59%, however, that includes the third-quarter net loss springing from a $9.15 billion provision for litigation reserves. The company's $17.5 billion in fourth-quarter residential mortgage-backed securities settlements had already been reserved for, but it also said its $2.6 billion in settlements over its role in the Bernard Madoff affair would lower fourth-quarter after-tax profits by $850 million.
Even with the hit to fourth-quarter profits from the Madoff settlement, it seems likely JPMorgan will come close to the 14% ROE figure cited as a potential "mid-cycle" level by Nomura.
"We expect legal costs will remain elevated, though analysis suggests that JPM is adequately reserved for remaining mortgage risks," Chubak wrote.
And if that really happens, investors may push JPMorgan's P/E multiple higher during 2014.
But Chubak believes JPMorgan's stock price already reflects its potential earnings power, and he sees "limited opportunity for more meaningful near-term earnings growth given continued pressures on FICC and Mortgage Banking, and limited expense opportunities given already best-in-class efficiency."
Chubak's neutral view of JPMorgan stands in contrast to Jefferies analyst Ken Usdin, who on Wednesday initiated his firm's coverage of the company with a "Buy" rating.
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