Philip van Doorn

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Oct. 18, 2019, 1:24 p.m. EDT

Bank of America may be as profitable as J.P. Morgan in two years, analyst says

James Shanahan of Edward Jones argues that Bank of America’s shares are undervalued

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By Philip van Doorn, MarketWatch

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Shanahan actually has “buy” ratings on Bank of America and J.P. Morgan. He believes J.P. Morgan’s current premium valuation is justified because of “consistently stronger revenue and earnings growth, and industry-leading profitability,” he wrote in an Oct. 15 report. But the following day, he wrote that Bank of America’s price-to-tangible-book-value ratio of 1.6 was “unwarranted” because of its “strengthened financial condition and improved profitability.”

Wall Street’s view

Here’s a summary of opinion of the Big Four among analysts polled by FactSet:

Bank Ticker share 'buy' ratings Share neutral ratings Share 'sell' ratings Closing price - Oct. 16 Consensus price target Implied 12-month upside potential
Bank of America Corp. /zigman2/quotes/200894270/composite BAC 54% 46% 0% $30.17 $33.07 10%
J.P. Morgan Chase & Co. /zigman2/quotes/205971034/composite JPM 44% 56% 0% $119.68 $122.50 2%
Citigroup Inc. /zigman2/quotes/207741460/composite C 83% 13% 4% $69.50 $81.75 18%
Wells Fargo & Co. /zigman2/quotes/203790192/composite WFC 19% 70% 11% $49.59 $49.70 0%
Source: FactSet

Bank of American and Citigroup have majority “buy” ratings, with Citi the current favorite among analysts as a remedial play on its low valuation (see the first table above).

All four can also be seen as dividend plays. Here are current yields along with how much each company raised its dividend after annual capital plans were approved by the Federal Reserve earlier this year:

Bank Ticker Dividend yield Most recent increase in quarterly dividend payout
Bank of America Corp. BAC 2.39% 20.0%
J.P. Morgan Chase & Co. JPM 3.01% 12.5%
Citigroup Inc. C 2.94% 13.3%
Wells Fargo & Co. WFC 4.11% 5.0%
 Source: FactSet

Economic outlook — a bright spot in third-quarter numbers

An interesting common theme Shanahan has observed this earnings season is continued strength in credit quality, particularly for U.S. consumers. Credit-card delinquencies typically increase during back-to-school shopping season, with non-performing card loans increasing through the holiday season, he said.

But despite some slowing of economic growth indicated by recent reports, third-quarter consumer-loan delinquencies “do not even reflect [normal] seasonal trends,” Shanahan said.

That is a big surprise and may point to better-than-expected strength for American consumers for some time.

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/zigman2/quotes/200894270/composite
US : U.S.: NYSE
$ 33.51
-0.16 -0.48%
Volume: 33.00M
Dec. 9, 2019 6:30p
P/E Ratio
12.35
Dividend Yield
2.15%
Market Cap
$301.43 billion
Rev. per Employee
$543,289
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/zigman2/quotes/205971034/composite
US : U.S.: NYSE
$ 134.41
-0.63 -0.47%
Volume: 8.58M
Dec. 9, 2019 6:30p
P/E Ratio
13.26
Dividend Yield
2.68%
Market Cap
$421.58 billion
Rev. per Employee
$497,647
loading...
/zigman2/quotes/207741460/composite
US : U.S.: NYSE
$ 75.33
-0.48 -0.63%
Volume: 8.92M
Dec. 9, 2019 6:30p
P/E Ratio
10.00
Dividend Yield
2.71%
Market Cap
$164.46 billion
Rev. per Employee
$479,167
loading...
/zigman2/quotes/203790192/composite
US : U.S.: NYSE
$ 53.92
-0.45 -0.83%
Volume: 15.11M
Dec. 9, 2019 6:30p
P/E Ratio
11.64
Dividend Yield
3.78%
Market Cap
$228.05 billion
Rev. per Employee
$392,114
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Philip van Doorn covers various investment and industry topics. He has previously worked as a senior analyst at TheStreet.com. He also has experience in community banking and as a credit analyst at the Federal Home Loan Bank of New York.

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