This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Bank of America Downgraded Following Stress Tests

Stocks in this article: BAC JPM PNC USB WFC

NEW YORK (TheStreet) -- Bank of America (BAC) has been one of the hottest big-bank stocks for a while, but Atlantic Equities analyst Richard Staite on Monday cut his rating on the bank's shares to "neutral" from "overweight."

Bank of America has been quite a strong play on the industry's recovery over the past two years. The company's shares closed at $17.56 Friday, up 13% this year, following returns of 34.5% in 2013 and 110% in 2012. The shares trade for 10.8 times the consensus 2015 Earnings estimate of $1.62 a share, among analysts polled by Thomson Reuters. The consensus 2014 EPS estimate is $1.31.

Staite cited several reasons for the downgrade, including the expected large year-over-year decline in first-quarter trading revenue expected for the largest industry players, the strong price performance this year, and the results of last week's first round of Federal Reserve stress tests.

The analyst lowered his first-quarter EPS estimate for Bank of America to 26 cents from 32 cents, while lowering significantly his 2014 EPS estimate to $1.33 from $1.48 and cutting his 2015 EPS estimate to $1.68 from $1.80. Staite also cut his price target for Bank of America to $18.50 from $20.00.

In its Dodd-Frank Act Stress Tests (DFAST) last week, the Federal Reserve tested 30 large banks' ability to remain well capitalized, with minimum Tier 1 common equity ratios of at least 5.0%, through a nine-quarter "severely adverse" economic scenario. All the banks passed, except for Zions Bancorporation of Salt Lake City.

But Bank of America's stress-test showing wasn't particularly strong, as its minimum Tier 1 common equity ratio under the severely adverse scenario was 6.0%, which was second lowest among the 29 banks passing the test.

That result doesn't necessarily bode well for the second round of the stress tests, which is the Comprehensive Capital Analysis and Review (CCAR), which applies banks' plans to deploy excess capitals to the same severely adverse scenario. This means Bank of America's shareholders may be disappointed with its plans for dividend increase and/or stock buybacks. It could even mean the company's 2014 capital plan gets rejected by the Federal Reserve.

"The stress test showed that BAC has a $13bn buffer over the minimum requirement and thus should just about be able to carry out a $5bn buyback and pay a $2.5bn dividend although we are somewhat nervous that it or another bank could be failed on a qualitative basis," Staite wrote in a note to clients on Monday. The analyst estimates Bank of America will raise its quarterly dividend to six cents from a penny.

Two Upgrades

Also on Monday, Staite upgraded Wells Fargo (WFC) and U.S. Bancorp (USB) to "neutral" ratings from "underweight" ratings.

For Wells Fargo, Staite raised the price target to $53 from $48, while lowering his first-quarter EPS estimate by a penny to a dollar, lowering his 2014 EPS estimate to $4.06 from $4.10, and lowering his 2015 EPS estimate to $4.12 from $4.16.

For USB, Staite raised his price target to $44 from $39, while leaving his first-quarter EPS estimate unchanged at 75 cents, lowering his 2014 EPS estimate slightly to $3.10 from $3.12, and lowering his 2015 EPS estimate by a penny to $3.35.

"We see these banks as a simple and safe way to play rising US interest rates. They both performed well in the stress test and we believe the revenue headwind from declining mortgage refinancing is now mostly over," Staite wrote when discussing the upgrades.

Wells Fargo and U.S. Bancorp have been the strongest performers among large-cap banks for several years. Wells Fargo's 2013 return on average tangible common equity was 17.74%, while U.S. Bancorp's ROTCE was 24.00%, according to Thomson Reuters Bank Insight.

1 of 2

Select the service that is right for you!

Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!


DOW 17,804.80 +26.65 0.15%
S&P 500 2,070.65 +9.42 0.46%
NASDAQ 4,765.38 +16.9840 0.36%

Brokerage Partners

Rates from

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs