Citigroup came out to the start the New Year by upping its price target on two of its favorite big banks, Bank of America (BAC) and JPMorgan Chase (JPM). I agree with the call as major banks should outperform the market in 2014 for a variety of reasons:
- Net interest margins should widen. The Federal Reserve has finally announced the start of its long awaited "taper" while committing to keeping short term interest rates near zero. This should increase banks' net interest margin nicely.
- The housing recovery should continue in 2014; albeit at a slower rate than 2013. This should continue to be beneficial for the value of mortgages banks hold on their balance sheets as well as for new mortgage originations.
- Job and economic growth are predicted to accelerate over 2013 levels which will allow credit write offs and reserves to continue to decline. Credit quality should also continue to increase.
- Financials sell for a ~25% discount to the overall market multiple. As conditions for financial institutions continue to improve, I expect that discount to narrow in 2014.
Let's take a look at the two major banks Citi upped its price targets on.
Bank of America - I have held this bank stock since it sold with a 5 handle back in 2011. I like it for some of the same reasons as Warren Buffett. I believe there are myriad reasons why this stock will continue to rise in 2014 and that Citigroup's new price target of $19 a share is probably a good "bogey" for its yearend price. Also was nice to see Citi move the equity from a "Neutral" to a "Buy"
In addition, to the reasons I listed above for positive trends for all major banks, Bank of America has its own attractions as a stock. First, it is one of the few major banks still selling for under book value (The other being Citigroup).
I also expect the bank to receive permission from Federal Reserve in 2014 to reinstate a much larger dividend which would be positive for the equity. Finally, I like the earnings trajectory of the company. BAC earned a quarter a share in FY2012 and is on track to make ~90 cents a share in FY2013. For FY2014, the consensus calls for over $1.30 a share in earnings.
JPMorgan Chase - Generally acknowledged as the best managed major bank during the financial crisis, the financial institution has been taken to the 'woodshed' in the last six months of the year by various federal agencies. Coincidentally this happened immediately after Jamie Dimon made several disparaging remarks around some of details of Dodd-Frank and some current fiscal policies.
I believe bank's management has learned its lesson and will be more discreet in the future and that regulatory actions will now decrease over time. Citigroup moved its price target to $72 a share from $66 previously this morning. This would represent more than 20% upside from current prices levels on the stock.
This bank stock is not expensive at under 10x forward earnings and at a little more than 10% over book value. After a down year for earnings due in part to settlements & regulatory actions, earnings should rise better than 30% in FY2014 to $6 a share according to the current consensus. JPM also provides a yield of 2.6%.