Nomura’s Steven Chubak and Sharon Leung worry that the Federal Reserve’s comprehensive capital analysis and review will lower the return on equity for Bank of America (BAC) and Citigroup (C), though JPMorgan Chase (JPM) comes out looking better in their new analysis. They explain:
Getty Images Recent discussions with investors have prompted us to consider the potential ROE/capital return implications from CCAR "bindingness"—i.e., the possibility that future compliance with minimum B3 targets under CCAR could force certain Universals to operate with higher levels of regulatory capital, driving commensurate declines in ROE. In response, we have incorporated two additional stressed capital parameters to our valuation approach to help us better assess future ROE implications from CCAR compliance, as well as through-the-cycle payout capacity.
New CCAR parameters suggest our previous approach underestimated required capital levels for Bank of America Bank of America and Citigroup, prompting us to cut our target prices for both firms, and a rating downgrade for Bank of America to Neutral (from Buy). We upgrade JPMorgan Chase to Buy (from Neutral) and raise our target price, as our analysis of new Pillar III capital disclosure validates higher RWA mitigation potential (100bp ROE upside).
Despite lowering its target price, Chubak and Leung still consider Citigroup their top pick “as shares still offer greatest upside (+21%), and best-in-class payout capacity through 2018 (120%, vs. 99% avg. for peers).”
Shares of Bank of America have dropped 0.6% to $16.12 at 11:45 a.m. today, while JPMorgan Chase has ticked up 0.1% to $59.73 and Citigroup has gained 0.6% to $52.27.
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