After a four-month hiatus due to the departure of its principal banking analyst, Bank of America Merrill Lynch has reinstated coverage of Citigroup and JPMorganChase with buy ratings.
Erika Penala, who follows 22 other financial companies, issued her first report on the banking giants on Wednesday with upbeat analyses. The banks were among those previously covered by Guy Moszkowski, who left in June to open the U.S. arm of London-based, broker-dealer Autonomous Research LLP. He also had buy ratings on Citigroup and JPMorgan.
Penala offered a soft shoulder to Citigroup, calling it "one of the more misunderstood banks" with the "most potential upside" among big banks because of its leverage to the recovery in U.S. housing and the lowly valuation of its stock price.
She put a price target of $45 on the New York-based bank. Citigroup shares closed Wednesday up 54 cents, or 1.6 percent, at $35.14 on the New York Stock Exchange.
The Merrill analyst said that investors have over-reacted to recent trading problems at JPMorgan, which led the bank to curtail its share buybacks. Dubbing the bank a "top pick," she said it is likely to resume a share buyback of $3 billion in the first quarter of 2013 and get a vote of health from regulators in March after submitting its latest stress test.
With capital markets revenue likely to have bottomed this year, JPMorgan should have a strong revenue story and be able to return 20 percent of its market capitalization through dividend increases and buybacks over the next two years, she wrote.
Penala, who primarily covers regional banks, said the strongest and largest regionals are much more expensively priced relative to their revenue than JPMorgan and Citigroup, and more vulnerable to the low interest rates that the Federal Reserve has outlined for the next two years.
She slapped a $48 price target, which Merrill calls a price objective, on JPMorgan, saying it is a "compelling investment opportunity" at its current value. Shares of the New York-based bank closed up 39 cents, or .94 percent, at $41.77 in New York Stock Exchange trading on Wednesday.
Merrill has not yet reinstated coverage on the broker-dealers, asset managers and exchanges that Moszkowski had covered.
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