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The Zacks Analyst Blog Highlights: Comerica, Wells Fargo, Bank of America, JPMorgan Chase and Citigroup

Zacks Equity Research

For Immediate Release
Chicago, IL – March 21, 2014 – Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include the Comerica Incorporated (CMA-Free Report), Wells Fargo & Company (WFC-Free Report), Bank of America Corporation (BAC-Free Report), JPMorgan Chase & Co. (JPM-Free Report) and Citigroup Inc. (C-Free Report).
Today, Zacks is promoting its ''Buy'' stock recommendations. Get #1Stock of the Day pick for free.

Here are highlights from Thursday’s Analyst Blog:

Rate Hike in the Cards? 2 Banking Picks

Yellen explained that going forward the Fed’s assessment of economic conditions would be qualitative. This is possibly a more prudent course, since the decline in unemployment rate may not have taken into account other factors such as people dropping out of the workforce voluntarily.

But the markets reacted sharply to another reply from the Fed Chair. When asked to clarify what the Fed thought was a “a considerable time,” she said: “You know, this is the kind of term it’s hard to define, but... it probably means something on the order of around six months or that type of thing.”

The Impact on Banking

Markets fell following this comment, probably because investors had not expected that the Fed was considering raising the rate that quickly. Banks, on the other hand, may not be averse to a rate hike. Even though a lower interest rate environment has reduced borrowing costs, it has also hit the amount they can charge customers for loans as well as other financial products.

Consequently, the net interest margin for banks has dipped, affecting revenue and earnings. In case of a rate hike, banks will try to charge a higher amount on loans than what it pays out on deposits. However, as the Fed has reduced its bond purchases, Treasury yields have appreciated which have adversely affected the bond portfolios of banks. New fiduciary norms arising out of the Dodd-Frank act have also hit the revenue of banks.
Challenges Ahead

Retail banking has been affected in a completely different way. Checking accounts are now a safe haven for customers. These hold large amounts of idle cash which pay little interest. As the key rate is hiked, customers will look for avenues which pay better returns. This cash will then flow into interest paying accounts. Given such a scenario, embracing new technological solutions is the only way in which banks can remain ahead of the curve.

It is clear that only banks which have the ability to adapt to new regulatory norms and adopt new technological challenges stand to profit from these changes. Strong balance sheets and good past performance are more obvious prerequisites.

Below we present two banking stocks with impressive track records, each of which also has a good Zacks rank.

Comerica Incorporated

Comerica Incorporated (CMA-Free Report) has three major business divisions. These are business and retail banking and wealth management. The company reported fourth-quarter 2013 earnings per share of 77 cents, beating the Zacks Consensus Estimate of 74 cents. With the rise in revenues, on the whole, the credit quality has also improved. Additionally, the company hiked its common stock quarterly dividend.

Comerica Incorporated holds a Zacks Rank #2 (Buy) and has expected earnings growth of 0.50% for the current financial year. At 7.80% growth estimate for the next year is more favorable. The forward price-to-earnings Ratios (P/E) for the current financial year (F1) is 16.74.

Wells Fargo & Company

Wells Fargo & Company (WFC-Free Report) has three business segments. These are wholesale, wealth and community banking. The company earned $1.00 per share in fourth-quarter 2013, thereby achieving earnings growth for the sixteenth consecutive quarter. The reported figure also beat the Zacks Consensus Estimate by 2 cents. Additionally, Wells Fargo announced consecutive dividend increases over the past few years with the latest hike of 20% being announced in Apr 2013.

Currently the company holds a Zacks Rank #2 (Buy) and has expected earnings growth of 3.60% for the current financial year. In this case as well, growth estimate of 5.50% for the next year is more favorable. It has a P/E (F1) of 12.01.

Policy changes may have a partially unwelcome impact, but some banks may be better placed to cope with these challenges. These stocks, in particular, would make additions to your portfolio.
Bank of America Set to Downsize

Bank of America Corporation (BAC-Free Report) is poised to lay off workers across its global trading and investment banking units. The news was confirmed by sources well acquainted with the matter to Bloomberg.

The latest move is undoubtedly part of BofA’s cost containment measure. However, will the job cut, which is expected to impact less than 5% of the workforce in the said units, generate considerable cost savings?

There is more to it. The layoff possibly initiates the streamlining of BofA’s trading segment, given its possibility of turning comparatively unprofitable in the future. It also reflects the changing economic scenario, wherein interest rate is likely to rise.

Until recently, the persistent low interest rates kept the demand for bonds low and attracted investors to the equity market. As a result, trading segments of large banks like BofA were doing exceptionally well.

However, for first-quarter 2014, major banks like JPMorgan Chase & Co. (JPM-Free Report), Citigroup Inc. (C-Free Report) projected a drop in trading revenues.

Overall political disturbances and a stringent regulatory environment have somewhat deterred the steady recovery in the equity market. Moreover, with the initiation of stimulus tapering, we observe a change in investor preference as well.

Demand for secured bonds and debentures at the expense of trading activities are on the rise due to expectations of higher assured returns in the future.

BofA currently carries a Zacks Rank #3 (Hold).

Today, Zacks is promoting its ''Buy'' stock recommendations. Get #1Stock of the Day pick for free.

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