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) and JPMorgan Chase (JPM) 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."

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.

Based on the current quarterly payout of 38 cents, JPMorgan's shares have a dividend yield of 2.64%. Following the Fed's announcement of CCAR results on March 26, Usdin expects JPMorgan to announce an increase in the dividend to 42 cents and an approved plan to buy back up to $5 billion in common shares from the second quarter of 2014 through the first quarter of 2015. Over the past two years, JPMorgan hasn't completed its approved stock buyback plans, because of losses springing from the "London Whale" trading debacle in 2012 and the series of mortgage related settlements in 2013.

Usdin estimates the bank will post first-quarter EPS of $1.34, with a 2014 EPS estimate of $5.80 and a 2015 EPS estimate of $6.30 from 2015.

"Relative to the other money-center banks, JPM's near-term numbers look more reasonable at this time," Usdin wrote, meaning that investors are likely to see more EPS estimate cuts for Bank of America and Citigroup heading into first-quarter earnings season.

"Overall, we look for total noninterest expense of $15.5B in 1Q and expect a downward trajectory throughout the year as JPM right-sizes the mortgage cost base and benefits from its 'business simplification" plans,' Usdin added. He rates JPMorgan Chase a "buy," with a price target of $66.00.

Citigroup

Citi will announce its first-quarter results on April 14, with a consensus EPS estimate of $1.22, compared to a restated 77 cents in the fourth quarter and $1.23 in the first quarter of 2013.

Shares of Citigroup closed at $47.43 Monday, down 9% this year, following a 32% return during 2013. The shares trade for 0.9 times tangible book value and for 8.3 times the consensus 2015 EPS estimate of $5.72. The consensus 2014 EPS estimate is $4.86.

Usdin on Monday cut his first-quarter EPS estimate for Citi rather significantly to $1.14 from $1.45, while lowering his 2014 EPS estimate $4.60 from $5.05 and his 2015 EPS estimate to $5.60 from $5.70. The first-quarter results will not include the net $360 million in pretax expenses from the fraud discovered in Citi's Banamex unit in Mexico, because the company restated its fourth-quarter results.

"We are currently $0.10 below the Street for 1Q, but expect the gap to close somewhat as the Street updates models prior to earnings. We remain 2% below the Street for '15 and believe the bank's 10% return on tangible equity target for next year could be tough to achieve (we model 9%)," Usdin wrote. He rates Citigroup a "hold," with s $56 price target.

Following the Federal Reserve's CCAR announcement on March 26, Usdin expects Citi to raise its quarter dividend to 10 cents a share from a penny, and to announce approval for $4 billion in share buybacks, up from $1 billion a year earlier.

Chart

Shares of Bank of America were up 0.6% in morning trading Tuesday, to $17.22, while JPMorgan was up 0.5% to $57.84 and Citigroup was up 0.4% to $47.91. This chart shows the performance of all three banks' stocks against the KBW Bank index and the S&P 500 since the end of 2011:

BAC ChartBAC data by YCharts

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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