Bank of America to Keep On Rising in 2013: Analyst

NEW YORK ( TheStreet) -- Bank of America ( JPM) should see a significant benefit from a stable net interest margin and housing recovery in 2013, according to JPMorgan Chase analyst Vivek Juneja.

In his fourth-quarter earnings preview for large-cap banks, Juneja on Friday reiterated his "Overweight" rating for Bank of America and raised his price target for the company's shares to $13 from $11.50, implying 23% upside from Thursday's closing price of $10.54. A stellar 91% year-to-date through Thursday's close followed a 58% decline in 2011, so the shares were still down 20% from the end of 2010.

The analyst raised his 2013 earnings estimate for Bank of America by four cents to $1.06 and increased his 2014 EPS estimate by a nickel to $1.37. Juneja said his rating reflected "significant benefit from potential housing market recovery, potential for significant increase in normalized earnings, ongoing improvement of capital levels, relatively attractive valuation, and position as a leading retail and commercial banking franchise in the US." Bank of America's cost-cutting program and "some good progress on mortgage related issues" were also cited by the analyst.

Juneja cut his price targets for six of the nine large-cap banks he covers. Aside from Bank of America, the only bank for which JPMorgan's price target was raised, was Citigroup ( C), with the target increasing to $43 from $41, implying 15% upside from Thursday's closing price of $37.29. Citigroup's shares were up 43% year-to-date, following a 44% decline during 2011. The shares were still down 21% from the end of 2010.

Juneja maintained his neutral rating for Citigroup, saying that the company "has an attractive franchise with good long-term growth opportunities in emerging markets and should also have good capital return potential over time as capital gets freed up from Citi Holdings," but that "emerging markets growth outlook is slowing near-term and capital return likely to be muted especially with annual stress tests" by the Federal Reserve.

Citi Holdings is the subsidiary into which Citigroup's noncore assets have been place, as part of former CEO Vikram Pandit's "good bank/bad bank" strategy to right-size the company's balance sheet and boost capital ratios. This strategy was accelerated last week along with other major initiatives to cut expenses, by new Citigroup CEO Michael Corbat.

In addition to bank of America, Juneja has "Overweight" ratings on the following large-cap banks:
  • Wells Fargo (WFC), with a price target of $41, implying 23% upside from Thursday's closing price of $33.26. Juneja lowered his price target for Wells Fargo by a dollar, "reflecting our modestly lower earnings forecast" of $3.65 for 2013. The analyst estimates the company will earn $3.95 a share in 2014.
  • U.S. Bancorp (USB), with a price target of $39.50, implying 25% upside from Thursday's closing price of $31.54. Juneja lowered the price target from $41, to reflect "lower EPS estimates and based on a P/E multiple of 11.8x versus the peer group multiple of 10.3x." U.S. Bancorp's premium valuation reflects its very strong earnings performance relative to other large-cap U.S. banks, with operating returns on average assets (ROA) ranging from 1.58% to 1.71% over the past five quarters, according to Thomson Reuters Bank Insight.
  • SunTrust (STI), with a price target of $32.50, implying 19% upside from Thursday's closing price of $27.20. The analyst cut his price target by a dollar, "reflecting our lower EPS estimates and based on 1.2x our YE 2013 tangible book value versus the peer group multiple of 1.5x because of its lower profitability level."
  • PNC Financial Services Group (PNC), with a price target of $72.50, implying 28% upside from Thursday's closing price of $56.54. Juneja lowered his price target for PNC from $80, because of a "lowerearnings forecast due to increased pressure on net interest margins."

Discounts to Book Value


Of the nine large-cap universal and regional banks covered in Juneja's report, only three were still trading at discounts to tangible book value, including Bank of America, at 0.8 times their reported Sept. 30 tangible book value of $13.48; Citigroup, at 0.7 times their reported tangible book value of $52.70; and with KeyCorp ( KEY), at 0.9 times their reported tangible book value of $9.54, based on Thursday's closing price of $8.14.

Even though he is expecting Bank of America's shares to return 23% over the next year, Juneja estimates the shares will still trade for just 0.9 times tangible book value at the end of 2013, or a "40% discount to expected peer median tangible book value multiple of 1.5x." The analyst expects "BAC to trade at a discount near term due to continued headline risk and some pressure on revenues."

The Margin Squeeze


Among the nine large-cap banks covered in Juneja's report, the analyst expects all except Bank of America to see at least a modest decline in net interest margin during 2013.

The net interest margins is the difference between a bank's average yield on loans and investments, and its average cost for deposits and borrowings. The Federal Reserve has kept its target short-term federal funds rate in a range of zero to 0.25% since the end of 2008. On Wednesday, the Federal Reserve Open Market Committee announced that it would continue to purchase $40 billion in mortgage backed securities each month, while initially continuing its monthly purchases of $45 billion in long-term U.S. Treasury securities in 2013, while no longer "sterilizing" the long-term Treasury purchases by selling equivalent amounts of short-term Treasury paper.

So most banks will be feeling the squeeze, since they have already enjoyed most of the benefit of the decline in deposit rates, while the loans and securities they invest in continue to reprice at lower rates.

According to Juneja's data, all but three of the large-cap banks saw their net interest margins decline during the third quarter from the second quarter, with PNC seeing the largest margin decline of 26 basis points, followed by Wells Fargo, with a decline of 25 basis points. But these two banks will still have relatively high net interest margins according to Juneja, who estimates margins of 3.78% for PNC and 3.61% for Wells Fargo, with PNC's margin only exceeded by BB&T ( BBT), with an estimated fourth-quarter net interest margin of 3.80%.

The analyst expects Bank of America's net interest margin to expand by 3 basis points during the fourth quarter, to 2.36%, which is, by far, his lowest estimated NIM among the nine large-cap banks. For 2013, Juneja expects Bank of America's margin to increase by one basis point, which may not seem like much, however, he expects a significant margin squeeze for most of the other large-cap banks, including a 23% decline for Wells Fargo, a 21% decline for PNC and a 20% decline for BB&T.

Most analysts expect the margin decline to be offset during 2013 by continued strong fee income from the mortgage refinancing wave, and a continued decline in credit costs as the economy continues to recover.

More Dividends Coming


Following the next round of Federal Reserve stress tests, Juneja expects all nine of the large-cap banks covered in the report to be approved to raise their dividends on common shares, with Bank of America going from the current nominal quarterly dividend of a penny a share to five cents a share in the second quarter of 2013, with the dividend increasing to even cents a share in the second quarter 2014.

Two other large-caps covered in the JPMorgan Report are currently paying quarterly dividends of just a penny a share. Juneja expects Citigroup to raise its quarterly payout to 25 cents a share in the second quarter of 2013, with the dividend increasing to 43 cents a share in 2013; and for Regions Financial ( RF) to increase its dividend to a nickel in the second quarter of 2013, going to six cents in 2013.

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-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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