As the prospects for U.S. regulatory reform improve, Credit Suisse is giving four of America’s biggest banks a favorable outperform rating. Analyst Susan Roth Katzke believes the share prices of Bank of America Corp. (BAC), JPMorgan Chase & Co. (JPM), Morgan Stanley (MS) and Citigroup Inc. (C) could get a boost of as much as 10%, according to Barron’s.
Since the beginning of the year through to the end of trading on Tuesday, both Bank of America was up 23%, JPMorgan was up nearly 15%, Morgan Stanley was up close to 17%, and Citi was up more than 22%. (To read more, see: 4 Bank Stocks to Buy Now: Strategas Partners.)
Despite poor trading revenues, which were expected due to seasonality and low market volatility, all four banks outperformed analysts’ estimates during the most recent quarter. Bank of America reported earnings per share (EPS) of $0.48 compared to a forecast $0.45; JPMorgan reported $1.76 compared to an estimate of $1.65; Morgan Stanley reported $0.93 compared to an estimate of $0.81; and Citi reported $1.42 compared to an estimate of $1.32.
While Katzke assures that her team of analysts at Credit Suisse will continue to monitor valuations in relation to the overall economic cycle, she is optimistic that these big four U.S. banks will see an average EPS growth of 10% year over year and an approximately 14% average return on tangible common equity for 2018. When taking a weighted average of the most optimistic, pessimistic, and base case scenarios, Katzke expects each of the four banks to achieve a 10%+ total return, according to Barron’s.
The major boost to banks’ share prices rests on the expectations of a much-improved operating environment coming from changes to the corporate tax code and regulatory reform under the Trump administration. (For more, see also: Big Banks May Soar Higher After Post-Crisis Records.)
A More Bank-Friendly Environment
Last week, Republican lawmakers unveiled their proposal to overhaul the U.S. tax code, which would significantly cut corporate taxes and bring about modest savings for the middle class. The plan to permanently cut the corporate tax rate from 35% to 20% would definitely help banks retain more of their gross profits.
Despite a leading Democratic lawmaker on the Senate Banking Committee recently walking away from negotiations over how to reform the Dodd-Frank Act, the Committee’s Republican chair and other Democratic Senators are still hopeful that a deal can be made to repeal some of the most stringent financial regulations put in place after the global financial crisis. Of course, many are confident that it will be regulators with a more relaxed attitude that will ultimately lead the way in effectively deregulating the banking sector, not lawmakers.