When discussing Basel III capital requirements, which under the Federal Reserve's rules will be fully phased-in in January 2019, Kotowski said that the Bank for International Settlement's determination that Citigroup and JPMorgan Chase should have enhanced capital buffer requirements of 2.5% as systemically important financial institutions (SIFI) while Bank of America, Goldman Sachs and Morgan Stanley should have lower buffer requirements of 1.5%, are "of course ridiculous conclusions, and we encourage our readers to ridicule them whenever they meet with banking authorities." The enhanced capital buffers for the SIFIs are added to the basic Basel III Tier 1 common equity ratio requirement of 7.0%. Kotowski expects all of the "big five" eventually to raise their Tier 1 common equity ratios to the 9.5% level, while "COF, USB, WFC and other retail-funded banks will probably run at a lower level." The analyst expects all of the large-cap banks to hit their Basel III requirements years in advance, with "the big five getting to the mid-9s by the second or third quarter of 2013. After that, the accretion should go all for either growth or to the shareholders."
Kotowski has "Outperform" ratings on four of the eight names covered in the report, and said that his price targets generally assume "that the banks trade at their historical average of 70% of the market multiple."
- Capital One. Even though the company "threw an air ball for the second fourth quarter in a row" with the company providing guidance for 2013 based on its disappointing results, Kotowski said "we suspect that Street expectations are now at a level that the company will probably meet or beat and that the stock is oversold at just 8.7X our 2013 estimate." Capital One's shares closed at $56.24 Wednesday. Kotowski's lowered his 2013 EPS estimate for the company to $6.50 from $7.03, with a 2014 EPS estimate of $7.15. His 12 to 18 month price target for the shares is $68.00.
- Citigroup. Citigroup's shares closed at $42.02, or 0.8 times their reported Dec. 31 tangible book value of $51.19. Kotowski's price target for the shares is $50.00. The analyst lowered his 2013 EPS estimate for Citi to $4.75 from $5.00, and estimates the company will jump to $5.63 in 2014.
- JPMorgan Chase. Kotowski raised his price target by a dollar to $63, "based on 10.5x our FY2013 EPS estimate of $6.01." Oppenheimer's 2014 EPS estimate for JPMorgan is $6.50. JPMorgan's shares closed at $46.23 Wednesday, trading for 1.2 times tangible book value, according to Thomson Reuters Bank Insight.
- Morgan Stanley. Kotowski's price target for the shares is $27, "based on current tangible book value per share. Our expectation is that the stock will track TBV for the foreseeable future." The analyst estimates that Morgan Stanley will earn $2.47 a share in 2013, with EPS rising to $3.06 in 2014.