Jefferies' Post-Election Bank Framework Suggests Potential for Additional Upside - (BAC) (KEY) (ZION) (USB) (WAL) (STL) (SIVB)

November 28, 2016 2:06 PM EST

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Jefferies has decided to re-evaluate the banking sector following a post-election rally. The sector's relative catch-up was sharp, but the re-valuation may turn out to be "stickier" compared to past events. The likelihood of fiscal policy changes are contributing to a steeper yield curve as expectations for positive EPS revisions and deregulation boosts investor sentiment.

Analyst Ken Usdin commented, "Our revived "normalized" earnings framework shows 20%+ potential to EPS, adding 50bp in rate hikes (+5% help), a 10% tax rate cut (+15%), and slight add'l. loan/fee growth vs. current ests. (w/+50bp by '18). Bank stocks have reflected bullish scenarios in part, but we still see upside in our bull/ bear valuation model. We upgrade/downgrade several names to reflect postelection stock/EPS dynamics. Top picks among Buys: BAC, KEY, ZION, USB, WAL, STL, SIVB."

Relative P/E multiples are above historical averages, but below peaks hit in 2007. Jefferies applied more conservative relative multiples on probability-weighted scenarios, and sees upper single-digit upside on average for the group.

Usdin continued in a note, "We acknowledge that the multi-year adage has been to trim back when banks run ahead on rates hopes, with something in the macro inevitably disappointing. The same air pockets could happen this time, but we also see more potential today for an extended move that could last more than a few weeks."

As noted earlier today, the firm downgraded several names that show relatively less upside than required (C, WFC, HBAN, RF, ASB, BPFH, RNST) in our updated framework, while they also upgrade a few that show better on the EPS/valuation potential, including CMA (rates/costs), ZION (rates/op. leverage), USB (quality/returns), and FHN (rates/growth).

The analyst raised his price targets on most stocks in the sector.



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