Ahead of Trump’s return to the White House, Bank of America raised its rating to buy

Steve Gelsey and Philip van Doorn

Citi analyst Kate Horowitz expects the divergence in bank stocks to narrow as the sector benefits from lower taxes and eased regulation under the second Trump administration.

On Friday, Bank of America Corp. raised Citi Research’s rating to neutral as analyst Keith Horowitz said he expects the stock market’s post-election divergence in bank valuations to smooth out.

Horowitz’s update focused on Bank of America’s (BAC) expected path to normalized returns on equity and assets of 15% and 1.2%, respectively.

For JPMorgan Chase ( JPM ), Horowitz expects a higher normalized return on tangible equity (ROE) of 17% and a corresponding normalized return on assets (ROA) of 1.2%

Shares of Bank of America rose 1% in premarket trading on Friday. Given the big rally the day after the presidential election, the stock is now up about 33% in 2024, while JPMorgan Chase shares are up about 39%.

Citi analyst Horowitz said Bank of America is the best liquid way to play the expected “convergence” of banking stocks compared to the current situation of a “relatively large” valuation spread between the “wealthy” and “non-wealthy” sectors.

Along with Bank of America, according to Horowitz, among the other beneficiaries of this expected trend is Regions Financial Corp. (RF), Citizens Financial Group Inc. (CFG), Capital One Financial Corp. (COF), Huntington Bancshares Inc. ), M&T Bank Corp. (MTB), PNC Financial Services Group Inc. (PNC) and Ally Financial Inc. (ALLY).

Horowitz compared the changes in bank stocks since the election of Donald Trump in 2016 to the current banking environment before his second term.

He expects the top corporate tax rate to be cut to 15% from 21%, which he says will lead to around 8% earnings per share for the banking industry.

He expects Trump to take a more relaxed approach to banking regulation with regard to capital requirements and other measures that would reduce risk to fee income streams such as late-payment fees — both of which would benefit Bank of America.

However, during Trump’s first term, rates were close to zero, which encouraged more lending activity. Although rates are expected to decline, they will not return to historically low levels.

“While there is some optimism for credit growth, we do not expect credit growth to increase significantly relative to previous expectations and note that spreads are likely to remain tight,” Horowitz said.

A quick look at the stock’s valuation further highlights why Bank of America stock may be the better buy at this juncture. And even JPMorgan Chase Chief Financial Officer Jeremy Barnum might agree, based on his comments during the bank’s Oct. 11 earnings conference call.

Barnum said that “repurchasing shares at more than twice their tangible book value is not necessarily the best thing to do because we believe that at some point we will have more opportunities to redistribute them or buy them back at lower prices.”

As of Thursday’s close, Bank of America shares were trading at 1.7 times tangible book value, compared with a five-year average price-to-book value ratio of 1.59, according to FactSet data. Meanwhile, JPMorgan Chase’s price-to-equity ratio was 2.48, compared to a five-year average of 2.04%.

-Steve Gelsey -Philip van Doorn

This content was created by MarketWatch, which is managed by Dow Jones & Co. MarketWatch is published independently of Dow Jones Newswires and The Wall Street Journal.

  (END) Dow Jones Newswires

  11-08-24 0831ET
Copyright (c) 2024 Dow Jones & Company, Inc.