Large banks are still coming to terms with what’s expected from them under the Fed’s annual Comprehensive Capital Analysis and Review, as we learned from the unexpected failures and rejected capital plans. By the same token, analysts are having to adapt their own models to keep up, and Nomura Securities International analysts Steven Chubak and Sharon Leung have recently added two additional parameters to their valuation models, forcing them to reduce some of their major bank price targets.
“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 [Basel III] targets under CCAR could force certain Universals to operate with higher levels of regulatory capital, driving commensurate declines in ROE,” they write.
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Citigroup Inc. (C), Bank of America Corp (BAC) look worse under new CCAR assumptions
Under their old model, Chubak and Leung had estimated that the range of required capital ratios would be fairly broad, from about 9.5% for Citigroup Inc. (NYSE:C) to 11% for Goldman Sachs Group Inc (NYSE:GS) and Morgan Stanley (NYSE:MS), and the main result of their new model is to tighten that spread to about 10.5% – 11%.
That means that valuations for banks already at the top end don’t change, but Citigroup and Bank of America Corp (NYSE:BAC) will need to hold more capital than had been expected, pulling their return on equity down in the process. Chubak and Leung have lowered their price target for Citigroup Inc. (NYSE:C) from $68 to $63 (currently $52.65), but have maintained the Buy rating and still consider it their top pick among the universals because of its high best-in-class payout capacity over the next three or four years. The have also cut the price target for Bank of America from $18 to $17 (currently $16.23) and downgraded it from a Buy to Neutral.
Nomura upgrades JPM to a Buy
Like Goldman Sachs Group Inc (NYSE:GS) and Morgan Stanley (NYSE:MS), the new analysis has no impact on JPMorgan Chase & Co. (NYSE:JPM), which is unaffected by CCAR bindedness, but new information that has come out under Pillar 3 disclosures suggests that JPM has ‘greater RWA mitigation potential’ than they had thought, causing Chubak and Leung to increase their price target from $64 to $69 (currently $59.84) and upgrade it to a Buy.