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Good morning,
Markets are called to open flat this morning. The markets are opening flat in Europe because:
1) Asian shares slid a second day, as Japan’s Nikkei 225 Stock Average headed for its biggest two-day drop since November 2011 and the yen reversed losses. The Nikkei 225 reversed gains of as much as 0.9%, extending yesterday’s 2.6% drop. The gauge has advanced more than 20% since mid-November, when the announcement of Japanese elections fanned speculation a new government would pressure the Bank of Japan, which meets next week, to add to stimulus.
2) The US economy picked up across much of the country last month, boosted by auto and home sales even as the outlook for unemployment showed few signs of improvement, the Federal Reserve said in its Beige Book business survey. All 12 of the bank’s districts reported some growth in consumer spending.
3) Big day for the markets today as Citigroup Inc., Bank of America Corp. and Blackrock Inc. are among companies on the S&P 500 scheduled to report earnings today
4) European Sovereign Bond Sales:
An interesting day today as Citigroup and Bank of America report results today. Since most investors hold or follow these stocks, I will spend some time discussing the companies and telling you what analysts are expecting.
JP Morgan analysis on Bank of America (Price $11.78, Price Target $13.50)
We continue to rate Bank of America Overweight longer term relative to our universe due to 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. BAC’s normalized earnings should benefit from large cost cutting program under way, faster reduction in the very large legacy asset servicing and other credit related expenses as housing market continues to improve, and decline in litigation expenses. There has been some good progress on mortgage related issues – some issues remain to be resolved but BAC has put aside sizable additional reserves. BAC has made solid progress in growing capital.
Our December 2013 price target is $13.50, which is based on 0.9x (unchanged) price to our YE 2013 tangible book value multiple, a 40% discount to expected peer median tangible book value multiple of 1.5x. We expect BAC to trade at a discount near term due to continued headline risk and some pressure on revenues. Bank of America is currently trading at 0.9x tangible book value, which is below the large cap banks median of 1.2x, and 9.0x our 2014 EPS estimate.
JP Morgan analysis on Citigroup (Price $42.48, Price Target $44.50)
We believe Citigroup 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. However, emerging markets growth outlook is slowing near-term and capital return likely to be muted especially with annual stress tests. Hence, we rate Citigroup stock Neutral despite attractive valuation. Longer term, we view the shares constructively relative to our universe due to: 1) attractive valuation with the shares trading below tangible book value; 2) strong and growing capital levels with potential for return of excess capital to shareholders; 3) revenue growth opportunities led by its emerging markets franchise (40% of Citigroup revenues in 2011); and 4) sizeable amount of loan loss reserves.
We are raising our December 2013 target to $44.50 from $43, reflecting increased earnings forecast. Our price target is based on a price to tangible book value multiple of 0.8x (unchanged) its expected YE 2013 tangible book value, a close to 50% discount to the expected peer group multiple of 1.5x. Citi currently trades at 0.8x price to tangible book and at 8.5x our 2014 EPS – both metrics below peer averages. While we expect Citi to continue to trade at a discount, we expect the discount to narrow gradually with improved performance and ultimately, increased visibility for return of capital.
My opinion – I think both banks are fairly priced but if I had to choose between the two I'd be a buyer of Citi. The problem with Bank of America is that when the crisis started in 2007, it got itself into a really big mess. Now the improvements we are seeing is becuase of lower costs of litigation, cost cutting, an improved mortgage book and an improvement in the housing market in the US. Though there is still the problem of Quantitative Easing and whether it will continue post 2013. The unemployment rate is still very high in the US and the World bank keeps on cutting global growth forecasts for 2013. I like to buy a company that tells a good story and I still see alot of uncertainty in the outlook for Bank of America. Put it differently, I do not see short term catalysts which will drive the price much higher from current levels.
Citi on the other hand is more conservative and is looking at growing in emerging markets though it is still too early in the day to expect to see large moves in prices in this stock. Again Citi is also effected by the US economy and although the housing market is picking up, with the debt ceiling the US is going to face next month, the high unemployment rate and the global slowdown, I still am not too enthusiastic about this stock and believe alpha can be generated elsewhere.
If I had to buy a US bank it would be Wells Fargo because in my opinion, it offers greater visibility and has a stronger balance sheet. Wells is currently trading at $35.09 and JP Morgan give it a Price Target of $41.
JP Morgan comments – We reiterate our Overweight rating due to 1) better fee income growth opportunities with recent acquisitions of loan portfolios, expansion of capital markets and wealth management businesses as well as leading mortgage banking position; 2) cost reduction plan; 3) lower international risk and capital markets exposure relative to peers; and 4) attractive valuation.
Our December 2013 target is $41, based on 10.4x our 2014 EPS estimate, in line with peer average. Wells Fargo is currently trading at 8.8x our 2014 EPS estimate, in-line with the group average.
Having said all this I think there are other sectors in the US which should outperform financials in 2013 and these include basic materials, food producers etc. I would stick to Ingredion, Bunge, Monsanto etc.
For a copy of our CC equity list, do not hestitate to contact us on 25688688.
Good day and happy trading!
Kristian Camenzuli
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