"Multi-year capital/cost initiatives have prepared Bank of America (BAC) for a tougher capital regime, and its strong position supports meaningfully higher payouts vs. peers, in our view," says analyst Steven Chubak, initiating coverage with a Buy and $19 price target.
"BAC's current business mix, improving efficiency, and higher rate sensitivity should support ~15% mid-cycle returns (on required capital) by 2016. Legal costs should remain elevated, but analysis suggests BAC is only moderately under-reserved for remaining Private Label exposure. Long-term ROE potential of ~15% supports PT of $19, or 14% potential upside."
"We see unparalleled ROE potential at Citigroup (C) under the new capital rules, as Citicorp efficiency targets are realized by 2015 and Citi Holdings turns profitable," he says, starting the bank at a Buy with $70 price target.
"We also see significant excess capital generation/best-in-class payout potential as the drag from Holdings moderates and DTA utilization accelerates. The above trends support through-the-cycle ROE potential of 15% and payout ratios >100%, which are not properly reflected in the shares, in our view."
BAC +0.5%, C +0.4% premarket
See also: Nomura launches JPM and MS at Neutral