Nomura Securities Upgrades Bank of America (BAC) to Buy

Nomura Securities upgraded Bank of America (NYSE: BAC) from Neutral to Buy with a price target of $18.00, saying capital protections are underappreciated and could come into play in the 2nd-half.

Analyst Steven Chubak commented, "BAC shares have not been immune to the most recent selloff, and despite the recent wave of sell side upgrades, concerns surrounding macro / rates and capital still weigh. The latter was a key factor in our decision to D/G BAC exactly one year ago with the view that CCAR-based capital constraints could result in weaker returns / payouts for BAC vs. peers. While the potential for even higher capital requirements still hangs over the G-SIBs, if the Fed were to incorporate tougher capital rules in CCAR, our latest findings show the ROE / valuation impact for BAC should be much less than peers, given:

• CCAR is less binding for BAC. Recall in the most recent CCAR that BAC suffered lower stressed losses than peers (% RWA), which we ascribe to the firm’s heavier gearing to domestic retail banking vs. trading (see note);
• Possible inclusion of G-SIB surcharges in CCAR is least impactful for BAC. As discussed in our recent note, the ROE / valuation impact from including surcharges in CCAR is much less for BAC than peers (-6% decline in FV, vs. -13% peer avg.). This is due to two factors: 1) For BAC, CCAR is less binding; and b) BAC falls into a lower G-SIB bucket (3%);
• Decision to exclude Advanced models from CCAR was a big win, as BAC’s Advanced RWAs meaningfully exceed Standardized (+$154bn).
• Market Risk (trading book) composes a smaller proportion of BAC’s Total RWA, suggesting it should be less impacted than peers if the Fed / Basel were to impose higher capital requirements on trading books; and
• RWA mitigation provides a meaningful source of value accretion. BAC’s 2Q mitigation progress was quite impressive (-$34bn, or -2% QoQ); continued progress could drive significant shareholder value.

For an analyst ratings summary and ratings history on Bank of America click here. For more ratings news on Bank of America click here.

Shares of Bank of America closed at $15.65 yesterday.

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