Bear To Bull: MKM Partners Initiates Coverage Across Universal Banks

In a report published Wednesday, MKM Partners analyst David Trone initiated coverage on Universal Banks.

The analyst initiated a Buy rating on JPMorgan Chase & Co. (NYSE: JPM), Bank of America (NYSE: BAC) and Citigroup (NYSE: C) on long-term opportunities.

Trone remarked that the universal bank stocks will likely be split-up, “thus releasing significant pent-up shareholder value” with 20 percent appreciation. The analyst sees excess capital build-up over the 2019- basis statutory benchmarks, “materially expanded” from the second quarter 2015 to the first quarter of 2016.

MKM Partners wrote, “Obviously, with big global financial institutions, anything can and will happen in the backdrop, but our base case assumes no noise and perhaps even a bit of an increase in the pace of global recovery. In this scenario, we see the universal banks rising 15%-20% over the next 12 months and in our absolute rating system, this warrants Buy ratings on each of JP Morgan, Citigroup, and Bank of America.

"Over this time, we expect the market to price in a higher level of buybacks for the 2Q15-1Q16 CCAR cycle. In our view, the bigger payoff is for truly long-term investors who can wait patiently for the break-ups.”

The analyst sees JPMorgan as the “strongest of the trio,” initiating a Buy rating and $65.00 price target. In the report, Trone sees progression towards a “new-normal” state and the build-up of excess capital.

Despite the expectation of the continuation of regulatory attacks, the analyst forecasts a 25 percent EPS growth in 2014 and 14 percent growth in 2015.

Bank of America has the benefits associated with its exposure to the U.S. consumer, according to Trone. Initiating a Buy rating and $18.00 price target, the analyst see the company perfectly positioned for growth. MKM Partners expects run-off to slow and the improvement of new loan growth.

Trone emphasized the “dramatic” drop in credit costs for Citigroup, regardless of the company's revenues down 15 percent over the past four years. According to MKM's analysis, the analyst reported that “Citigroup already has $8.2 billion of excess capital above a 75 bps margin of error on top of the statutory benchmark of 9.0%.”