What happens when one analyst from a major Wall Street bank changes ratings on other banks on Wall Street? That’s the question regarding a Deutsche Bank analyst call from Tuesday’s daily Top Analyst Upgrades & Downgrades. A key ratings change has been seen for the top money-center banks right before the September 17-18, 2024 FOMC meeting where Jerome Powell and his band of voting Fed presidents are expected to finally start cutting interest rates.
Deutsche Bank’s Matt O’Connor decided to remove his Buy rating on the bank with the best balance sheet of all major money center banks in favor of one bank that may still be in a discounted turnaround position and another bank which looks and feels the most like JPM with better valuations. This is a classic “Strategic” strategy to pick the banks with the most implied upside to any price target over other banks that have run up more or where the valuations are higher.
JPMorgan Chase & Co. (NYSE: JPM) was downgraded to Hold from Buy with a $235 price target at Deutsche Bank. Without considering the dividend yield of 2.05%, that is now calling for the strongest of the mega-banks in the U.S. to only have about 4.5% upside from its prior $224.80 closing price.
Deutsche Bank then raised its coverage rating on Wells Fargo & Co. (NYSE: WFC) to Buy from Hold. The firm’s $65 price target implied upside of about 11% from the $58.47 prior closing price. Deutsche Bank also raised Bank of America Corporation (NYSE: BAC) to Buy from Hold with a $45.00 price target, implying upside of about 10% before considering the dividend.
This move of favoring one bank (or two) over another is actually not uncommon other than it is favoring two banks over the bank that has every other bank’s envy. The ratings changes also came with no changes to the price targets, meaning the two banks favored now simply have more potential upside than JPMorgan Chase based on current stock prices.
Here is some proof that this view is more “Strategic” rather than secular in the bullish bank calls. Deutsche Bank had raised JPMorgan to Buy from Hold back on January 9, 2024 and then also raised its price target to $190 from $140 at the time. And on that same day back in January, Deutsche Bank downgraded Wells Fargo to Hold from Buy with a $51 price target. That was right before the January earnings reports were issued by the major banks.
Since the start of 2024, Wells Fargo’s gain of 19.5% and BofA’s gain of 21% have been dwarfed by JPMorgan Chase’s YTD gain of 31%. Several factors were cited in the Deutsche Bank report for why JPM has outperformed in 2024:
- better-than-expected net interest income;
- strong trading results (Wells Fargo has much less trading);
- a partial investment banking recovery;
- higher credit quality;
- and of course the fortress balance sheet.
JPM’s consensus analyst price target of $223.82 currently implies that Wall Street sees the bank as fairly valued. And its 52-week high of $225.48 is also its all-time high with a $633 billion market cap at this time. Here are some other key stats for Jamie Dimon and friends:
- Price/Book 2.00
- Price/Earnings (Forward) 12.9
- Dividend Yield 2.05%
- Return on Equity 16.4%
Wells Fargo’s consensus analyst price target of $63.99 currently implies that Wall Street analysts still see some upside left. Its 52-week high of $62.55 sees the bank as fairly valued. And its 52-week high of $62.55 is still handily short of its $65+ all-time high from 2018. Wells Fargo currently has a market cap of about $200 billion at this time. Here are the same stats above shown for a direct comparison:
- Price/Book 1.25
- Price/Earnings (Forward) 10.6
- Dividend Yield 2.7%
- Return on Equity 10.5%
The Bank of America call implies about 10% upside to O’Connor’s $45 price target and that is more or less in-line with the consensus analyst target price of $45.79. Here are BofA’s common ratios considered by traditional financial and bank investors:
- Price/Book 1.20
- Price/Earnings (Forward) 11.1
- Dividend Yield 2.4%
- Return on Equity 8.5%
*** All financial ratios are from FinViz data
While these formal analyst calls do come with “Buy” and “Hold” ratings, those are the opinions of Deutsche Bank and are not formal ratings nor are they official views of Oggonomics. All decisions to buy, sell, hold or avoid are the responsibility of each investor and those decisions should be made with a financial advisor.
