Banking & Finance

UBS Upgrades U.S. Bank Sector to Overweight From Neutral

With the economy showing strength, especially versus other areas around the globe, investors looking to find solid investments may want to stay right here when shopping for top banks to own in a portfolio. In a new report, the analysts at UBS, while remaining very neutral on big global banks, upgrade the U.S. banking sector to Overweight. The upgrade of U.S. banks reflects the analysts’ positive macro growth outlook that should broaden the recovery in credit demand, while the start of a new interest rate tightening cycle from mid-2015 bodes well for sector margins.

The UBS research report focuses on three top banks based in the United States, and an additional stock to buy that, while based in Canada, does a tremendous amount of business in both countries.

Bank of America Corp. (NYSE: BAC) is rated Outperform and still remains perhaps the perfect contrarian pick. A huge accounting snafu hurt the stock in the spring, and the government’s legal settlements on bad mortgages took quite a hit on the balance sheet. In adding up the sum-of-the-parts value for the stock, which trades at a deep discount to regional bank metrics, many on Wall Street see sizable value in the stock. It is also important to remember the huge impact that Merrill Lynch has on the bottom line.

Bank of America investors are paid a 1.17%. The UBS price target for the stock is $20. The Thomson/First Call consensus price target is $18.15, and shares closed Friday at $17.04.

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Citigroup Inc. (NYSE: C) makes the list at UBS, and is trading at a very reasonable 11.5 times forward 2015 earnings. In addition, the bank is still trading below the 52 week high set for the stock way back in January of this year. With its tremendous global business model, the UBS analysts feel that the banking giant’s current market multiple is very discounted compared to peers. While regulatory and capital standards will continue to be a factor, the risk is well overridden by the upside potential.

Citigroup still just pays a tiny 0.1% dividend. While UBS has a $61 price target, the consensus target for the stock is $59.43. Shares closed Friday at $53.97.

Morgan Stanley (NYSE: MS) continues to show tremendous growth, and it is running neck and neck with Goldman Sachs as the bank of choice for high-profile IPOs. Though trading at a price-to-earnings multiple of 12, that seems extremely reasonable given the 2015 expectations for earnings-per-share growth of more than 20%, a price-to-book ratio of 1.00 and a price-to-sales ratio of 1.96. The company also has $602 billion in cash equivalents on its balance sheet, versus $368 billion in total debt.

Morgan Stanley investors are paid a 1.1% dividend. The UBS price target is $42, and the consensus objective is $36.60. Shares closed Friday trading at $35.18.

Toronto-Dominion Bank (NYSE: TD), though obviously based in Canada, is a stock on which the UBS team is very positive. TD Bank is one of the 10 largest banks in the United States, providing more than 8 million customers with a full range of retail, small business and commercial banking products and services at approximately 1,300 locations throughout the Northeast, Mid-Atlantic, Metro D.C., and the Carolinas and Florida. The bank has continued an aggressive U.S. expansion plan that the UBS team sees as a strong adjunct to the Canadian business.

Toronto-Dominion investors are paid a very solid 3.3% dividend. The UBS price objective is $65, while consensus target is $61.09. Shares closed trading on Friday at $50.49.

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While the market may very well experience a rally into year’s end, investors should be looking to lower portfolio volatility after such a large run. Buying any of these top banks is a good addition to any well-rounded growth portfolio.

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