Bank of America Downgraded; Goldman Chooses Citi, MS Instead

[Stocks-to-Watch]

Goldman Sachs analyst Richard Ramsden questioned Bank of America’s (BAC) recent momentum, and urged investors to choose other big banks if they want to play the sector. BAC was up about 30% this year before this morning, but is down 3.2% so far today.

“Following BAC’s 4Q11 capital actions, passing the stress test has become investors’ expectation and is reflected in its share price, limiting near-term upside,” Ramsden wrote in a note today.

It will be tough for Bank of America to boost earnings power at the same time as it cut costs, Ramsden argues.

Citigroup (C), on the other hand, could return a significant amount of capital this year if the Fed agrees with its capital plan. In fact, Ramsden think the bank could boast a 4.3% effective yield this year. By 2014, Ramsden sees the bank posting a 12% return on equity.

“[O]ur base case for Citigroup is a dividend of 40 to 50 cents? and share repurchases of $3-$4 billion,” Ramsden wrote.

“While a rebound in capital markets would benefit the entire group, we believe expense containment will be more achievable at C (in terms of lost revenues) relative to BAC. C spent $3.9 billion on investment spend in 2011, and we believe it should be able to cut those costs in half as we estimate $1.75-$2 billion were one-time in nature (tech spend, compliance). This combined with lower episodic/legal costs could add upside to C’s estimates. For BAC, while it plans on taking out $8 billion of costs over the next two years (which we view as achievable), we expect this will result in continued reduction to its earnings power…”

Ramsden also took JPMorgan Chase (JPM) off of Goldman’s conviction list, although it is still rated at Buy (funny timing: just last week, a JPM analyst in London downgraded Goldman).

Ramsden upgraded Morgan Stanley (MS) to Buy and added it to the conviction list.

“With the stock currently trading at around 65% of tangible book value, we believe the risk/reward is skewed favorably for MS as the company is better positioned following its aforementioned cleanup to print stronger ROEs with fewer moving pieces and better early 2012 trading results.”

Original Article Source by Barrons.com