Goldman Diverges On 2 Big Banks: Reiterates Conviction Buy On Bank of America, Downgrades Citi

The stock valuations of Bank of America Corp BAC and Citigroup Inc C are attractive, and both companies offer improved returns through cost restructuring, Goldman Sachs’ Richard Ramsden said in a report. He added, however, that while the former could offer 10 percent ROTCE by 2018, the latter would likely continue falling short of its target.

Ramsden reiterated a Buy rating on Bank of America and raised the price target from $17 to $19. He downgraded the rating on Citigroup from Buy to Neutral and reduced the price target from $52 to $50.

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Bank of America

“We believe BAC is hitting an inflection point with operating leverage being driven by a combination of low single digit revenue growth, absolute reductions in the expense base, and stable credit,” Ramsden wrote. He expected the company to generate revenue growth of ~4 percent per annum through 2018, backed by growth initiatives in the consumer bank and wealth management.

Moreover, cost restructuring is unlikely to impact revenues, since most of the expense initiatives “stem from lower data center costs and continued run off in the LAS portfolio.” The analyst added that Bank of America could generate EPS growth of a 13 percent CAGR through 2018, significantly higher than the peers average of 4 percent.

Citigroup

“The [previously anticipated] earnings inflection has failed to materialize and ROEs are currently well below management’s 10% target at 7.7%,” Ramsden pointed out. He added that although significant investments had been made into higher return businesses, such as credit cards, the macro environment would keep Citigroup’s earnings under pressure.

“Ultimately, we view this story as centered around capital returns, which we see as a dormant theme until next year’s CCAR process,” the analyst added.

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