Citi Research changed its rating on Bank of America Corp. from “neutral” to “buy” on Friday. Analyst Keith Horowitz said he thought there would be less of a difference in the prices of bank stocks after the election.
The main point of Horowitz’s raise is how the company thinks Bank of America (BAC) will get to normalized returns on equity and assets of 15% and 1.2%, respectively.
For JPMorgan Chase JPM 0.45% Horowitz thinks that the normalized return on tangible common equity (ROE) will be 17% and the normalized return on assets (ROA) will be 1.2%.
In Friday morning trade, Bank of America’s stock went up 1%. The stock is now up about 33% in 2024, with a big boost the day after the election. JPMorgan Chase’s stock has also gone up about 39%.
Citi analyst Horowitz said that Bank of America is the best way to play an expected “convergence” among bank stocks. This is because there is currently a “relatively wide” price spread between the “haves and have nots” in the sector.
Horowitz said that this expected trend will also help brands like Ally Financial Inc. ALLY -1.55%, Regions Financial Corp. RF 0.53%, Citizens Financial Group Inc. CFG -0.46%, Capital One Financial Corp. COF 0.10%, Huntington Bancshares Inc. HBAN -0.78%, M&T Bank Corp. MTB 0.66%, and PNC Financial Services Group Inc. PNC 0.06%. Other brands that will benefit are Ally Financial Inc.
Horowitz compared how bank stocks changed after Donald Trump was elected in 2016 to how things are now as he starts his second term.
He thinks that the top rate of corporate income tax will go down from 21% to 15%. This, he said, would mean that banks would make about 8% more per share.
He thinks Trump will be less strict on bank regulations, especially when it comes to capital standards and other measures. This would lower the risk to fee-based income streams like late fees, which would be good for Bank of America.
Rates were close to zero during Trump’s first term, though, which led to more loans. Even though rates are likely to go down, they won’t go back to those all-time lows.
“There is some hope for loan growth, but we don’t think it will be much better than what we thought it would be, and we should keep in mind that spreads are likely to stay low,” Horowitz said.
A quick look at how much stocks are worth shows why Bank of America’s stock might be the better buy right now. And Jeremy Barnum, the chief financial officer of JPMorgan Chase, may agree based on what he said during the bank’s Oct. 11 earnings call.
“Buying stock back at more than two times tangible book value is not always the best thing to do,” Barnum said. “We think we’ll have better opportunities to redeploy it or buy it back at cheaper prices at some point.”
FactSet says that the five-year average price/tangible book ratio for Bank of America’s stock was 1.59, but as of Thursday’s close, it was trading for 1.7 times tangible book value. In the meantime, JPMorgan Chase’s price/tangible book ratio was 2.48, which is higher than the average five-year value of 2.04%.
