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Bad News for Big Banks Favors Bank of America, JPM

NEW YORK (TheStreet) -- Earnings estimate revision trends are likely to favor Bank of America (BAC - Get Report) and JPMorgan Chase (JPM - Get Report) over Citigroup (C) over the next year, according to Jefferies analyst Ken Usdin.

Sell-side analysts' earnings estimate revisions are important, because they can have quite an effect on stock prices.

JPMorgan Chase at its annual investor conference in February said first-quarter equity and trading activity was running at roughly 15% lower than a year earlier, and analysts have responded by lowering 2014 earnings estimates for JPM and other big banks.

Usdin in a note to clients Monday described the first-quarter earnings setup for the big banks as "fairly challenging," because of the weak trading results, slowing mortgage lending volume, declining releases of loan loss reserves, continued pressure on net interest margins and litigation expenses that are still "elevated."

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Here's a quick review of stock performance and valuation for these three banks, along with a preview for the first quarter and Usdin's thoughts on what lies ahead.

Bank of America

Bank of America will announce its first-quarter results on April 16, with analysts polled by Thomson Reuters on average estimating earnings of 29 cents a share, matching the company's fourth-quarter EPS, but increasing from 10 cents in the first quarter of 2013.

Bank of America's stock closed at $17.11 Monday, returning 10% this year, following a return of 34.5% during 2013. The shares trade for 1.3 times tangible book value, according to Thomson Reuters Bank Insight, and for 10.6 times the consensus 2015 EPS estimate of $1.62. The consensus 2014 EPS estimate is $1.32. That forward price-to-earnings ratio is considerably higher than those for JPMorgan Chase and Citigroup, although it is not very high when compared to the forward P/E ratios for most regional banks.

Usdin on Monday cut his first-quarter EPS estimate for Bank of America to 25 cents from 28 cents, and lowered his 2014 EPS estimate to $1.30 from $1.35. He left his 2015 EPS estimate for BAC unchanged at $1.70.

The analyst expects continued progress from the bank's "Project New BAC" expense initiative, with "an incremental $100mm of saves expected in 1Q)," as well as a decline in legacy asset servicing (that is, servicing problem loan portfolios originated before the housing bubble burst in 2008) to $1.6 billion from $1.8 billion in the fourth quarter.

The Federal Reserve will announce the results of its annual stress tests of major bank holding companies on Thursday. Then on March 26, the Fed will announce the results of its Comprehensive Capital Analysis and Review (CCAR), which incorporates banks' plans to deploy excess capital into the same stress test scenarios. Following the regulator's announcement on March 26, most large-cap banks are expected to announce their plans for dividends and stock buybacks from the second quarter of 2014 through the first quarter of 2015.

Usdin expects Bank of America to raise its quarterly dividend to 5 cents from a penny, and to regulatory approval for $5 billion in common-share buybacks, which is the same amount it was approved for last year.

Usdin rates Bank of America a "buy," with a price target of $20, and still sees "upside to Street estimates next year."

JPMorgan Chase

JPMorgan will kick off first-quarter earnings season on April 11, with analysts on average expecting EPS of $1.43, increasing from $1.30 in the fourth quarter, but declining from $1.59 in the first quarter of 2013.

JPMorgan's shares closed at $57.58 Monday, down 1% this year, following a 37% return during 2013. The shares trade for 1.5 times tangible book value and for 9.1 times the consensus 2014 EPS estimate of $6.35. The consensus 2014 EPS estimate is $5.90. Among the 24 components of the KBW Bank Index (I:BKX), only Citigroup trades at a lower forward price-to-earnings ratio.

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