It is always interesting when bank analysts and brokerage firm analysts upgrade or downgrade their peers and competitors. The same is true for when they initiate research coverage. So what are investors supposed to think when Bank of America Corp. (BAC) started coverage on several regional banks with upside of on average more than 20%?
Merrill Lynch's research call unfortunately tells us very little about any pre-earnings expectations for Bank of America, nor about its peers in the bulge bracket brokerage firms and money-center banking giants. It does give us a clear hope that at least several select regional banks could have significant upside for their investors.
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Wednesday's research call initiated Buy ratings in shares of IBERIABANK Corp. (IBKC), SVB Financial Group (SIVB) and Texas Capital Bancshares Inc. (TCBI). The bank East West Bancorp Inc. (EWBC) was given only a Neutral rating, and Hancock Holding Co. (HBHC) was given an Underperform rating. Be advised that this research call does note that the small-to-mid-cap bank sector as a whole is fairly valued due to big gains in 2013.
The report says that the Buy-rated names do not need the economy to pick up or for rates to rise in order to deliver on loan or earnings per share growth.
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SVB Financial Group (SIVB) was started as Buy with a $110 price target, under the gumption that the valuation rerating is not over. This was the top pick among the Buy ratings. The team sees earnings of $7.75 per share, or about 50% in earnings per share (EPS) upside to its 2015 earnings, assuming higher short-term interest rates. The $110 price target was given upside of $132, if multiple expansion is seen due to strong technology performance. With a most recent closing price of $87.18, this implies upside of 26% to the target price and implies longer term upside of more than 51%, if the multiple expansion and longer-term growth drivers hit home.
IBERIABANK Corp. (IBKC) was started as Buy with a $66 price target, which implies upside potential of 22%. The research report calls this a self-help story as operating leverage boosts returns. It says that the franchise investments and excess capital have depressed returns recently, but the bank expects improving operating leverage to boost EPS growth.
Texas Capital Bancshares Inc. (TCBI) was started as Buy with a $55 price target. This implies upside of 22% and is called "Texas growth at a discount." That sounds good enough on the surface. TCBI also is said to be among the cheapest of the banking stocks covered at the firm. The team said:
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We believe that concerns surrounding the earnings per share impact from slowing mortgage activity are overdone and expect the stock to outperform and valuations to play catch-up as investors refocus their attention on the above average organic growth potential of this Texas lender.
Hancock Holding Co. (HBHC) was started as Underperform with a $29 price target, but that implies 6% downside to the target price. The research report said that there is possible earnings downside ahead, and that is even with shares having underperformed so far this year.
East West Bancorp Inc. (EWBC) was given the Neutral rating, and it is hard to find many who care about that. Its valuation was said to fairly reflect its return profile, and the bank has risen 50% year to date, versus 23% for the median peer group. Enough said as far as we are concerned.