Bank of America Corp. received an upgrade from neutral to buy by Citi Research on Friday. Analyst Keith Horowitz anticipates a reduction in valuation disparities among bank stocks following the election.
The upgrade is predicated on Horowitz's projection that Bank of America will attain normalized returns on equity and assets of 15% and 1.2%, respectively.
In reference to JPMorgan Chase, it is anticipated that there will be an increased normalized return on tangible common equity (ROE) of 17%, along with a corresponding normalized return on assets (ROA) of 1.2%.
During premarket trading on Friday, Bank of America's stock experienced a rise of 1%. Following a substantial surge that occurred the day after the presidential election, the stock has demonstrated an approximate increase of 33% in 2024, while JPMorgan Chase has witnessed a gain of approximately 39%.
Horowitz highlighted Bank of America as the most effective liquid option to capitalize on the anticipated "convergence" among bank stocks, contrasting it with the current "relatively wide" valuation gap between the sector's leaders and laggards.
In addition to Bank of America, Horowitz identified other potential beneficiaries of this trend, including Regions Financial Corp., Citizens Financial Group Inc., Capital One Financial Corp., Huntington Bancshares Inc., M&T Bank Corp., PNC Financial Services Group Inc., and Ally Financial Inc., all of which hold buy ratings.
He drew parallels between the movements in bank stocks following Donald Trump's election in 2016 and the current banking landscape as he approaches a second term.
Horowitz expects the maximum corporate income tax rate to decrease from 21% to 15%, which he believes would result in an approximate 8% increase in earnings per share for the banking sector.
He also anticipates that Trump will adopt a more lenient stance on bank regulations regarding capital requirements and other measures, which would mitigate risks to fee revenue streams, such as late fees, ultimately benefiting Bank of America.
During Trump's initial term, interest rates hovered around zero, which led to increased loan activity. Although rates are anticipated to decrease, they are unlikely to revert to those historically low figures.
"There is some hope for loan growth; however, we do not foresee a significant increase in loan growth compared to previous expectations, and we anticipate that spreads will likely remain narrow," stated Horowitz.
A brief examination of stock valuations highlights why Bank of America’s stock may currently be the more favorable investment. This sentiment may also be echoed by JPMorgan Chase’s CFO, Jeremy Barnum, based on his remarks during the bank's earnings conference call on October 11.
Barnum noted that "repurchasing stock at more than twice tangible book value may not be the most prudent strategy, as we believe there will be better opportunities to reinvest or to buy back shares at lower prices in the future."
As of the market close on Thursday, Bank of America's stock was valued at 1.7 times its tangible book value. This is in contrast to its five-year average price-to-tangible book ratio of 1.59, as reported by FactSet. In comparison, JPMorgan Chase's price-to-tangible book ratio was 2.48, against a five-year average valuation of 2.04%.