While the chatter on Wall Street has continued to focus on downside earnings per share risk from banks next year, the sooner the estimate cuts are finally factored in, the sooner stock prices may start to move higher. In a new research report, Merrill Lynch cuts earnings estimates and price targets an average 4% across the firm’s 41 banks in their coverage universe.
The Merrill Lynch team now assumes there will be no Federal Reserve rate hikes this year, while many on Wall Street predict a December hike. Though the firm has dropped the estimates for the mega-cap banks 3% for the third quarter, any upside surprises could be met with some serious buying.
Merrill Lynch has three mega-cap bank stocks rated Buy.
This banking giant is actually starting to hit some Wall Street firms’ screens as a value play. Citigroup Inc. (NYSE: C) is very cheap, trading at just 9.15 times estimated 2015 earnings, and it is the nation’s fourth-largest bank by assets. Numerous Wall Street analysts cite the fact that Citigroup will be a leader in buyback payouts to shareholders. Combined with the bank’s strong domestic and international business, and a better overall economy, plus the headline risk over bank stress tests being removed, share purchases look wise here.
Citigroup trades at 85% tangible book value (TBV), which is where the stock has often found support in the past. While they do lower their numbers, they think that is priced in and they see the TBV growing 14% by this time next year. With Citigroup scheduled to report earnings this week, aggressive accounts could buy stock in front of the release on Thursday.
Citigroup investors are paid a small 0.4% dividend. The Merrill Lynch price target for the stock is $65, and the Thomson/First Call consensus price target is $64.15. Shares closed Friday at $51.38.