Banking & Finance

Why Bank of America Shares Were Downgraded

Bank of America Corp. (NYSE: BAC) has its share of fans, and its share of critics. A fresh report from BMO Capital Markets would indicate that Bank of America just lost one its fans. Whether that means it now has a critic is another matter. BMO Capital Markets had an update to its six “Best Ideas” list in financial coverage. The report included BMO downgrading Bank of America shares from Outperform to Market Perform.

What was interesting to see was BMO has a new hierarchy to its money center bank coverage. Also, its target remains just under the consensus price target of other analysts on Wall Street. Bank of America shares were lower after the call, but not really anything out of the ordinary compared to its peers, which were mentioned below in this analyst report.

BMO’s James Fotheringham said in the downgrade:

Our proprietary monitors of system-wide credit (benign trend) and capital (more than adequate) continue to point to “Value vs. Growth” as the best analysis to generate investment ideas within the North American financials sector. Within this framework, Bank of America’s relative position was affected negatively by slower-than-expected capital development …

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BMO’s new hierarchy among the money center banks is now listed in order of preference, as follows:

  • Citigroup Inc. (NYSE: C) was called an event-driven trade as the market continues to underestimate its potential to grow capital. Citi was the one Outperform rating left in the money-center banks, and BMOs’ target price is $66.
  • JPMorgan Chase & Co. (NYSE: JPM) is rated as Market Perform with a $68 price target. Still the upside in the price target is based on being positively surprised by potential capital growth at JPMorgan.
  • Bank of America has an $18 price target.
  • Wells Fargo & Co. (NYSE: WFC) has an Underperform rating and a $53 price target.

Also on Bank of America and JPMorgan, the BMO report said:

Our forecasts for capital growth at Bank of America have been affected negatively by the higher than anticipated impact of measuring risk-weighted using the advanced methodology under Basel 3; the company has guided for a 100 basis points subsequent negative impact to its Basel 3 common equity tier 1 ratio (fully-phased, advanced). Bank of America’s higher capital deficiency (relative to our 11.5% threshold) versus previous estimates affects our view of capital-adjusted value and growth.

In contrast, we were pleasantly surprised by the recent 1Q15 demonstration of capital growth at JP Morgan Chase, driven by a greater-than-expected decline (of -3% sequentially) in risk- weighted assets.

Bank of America shares were last seen down 0.8% at $16.23, against a 52-week range of $14.37 to $18.21. The consensus analyst price target is $18.24.

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Citigroup shares were last seen down 1.1% at $52.78. The 52-week range is $46.08 to $56.95, and the consensus price target is almost $62.50.

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