Credit Suisse has updated its earnings model for Bank of America Corp (NYSE:BAC) to reflect changing macro assumptions--- slower loan growth (through the first half of 2017), more favorable commercial credit quality trends, and higher interest rates (the likelihood that our banks benefit from at least two rate hikes in 2017). Incorporating these changes, the firm is raising its full year 2017 estimate, to $1.74 from $1.72 per share. Carrying through the assumed benefit of additional U.S. interest rate hikes, with reasonably conservative deposit beta assumptions, Credit Suisse’s 2018E increases to $2.10 from $2.05 per share. Factoring in these estimate changes, the firm's target price increases to $27 from $26.
Credit Suisse arrives at its $27 target price for BAC using a weighted average of Credit Suisse's blue sky scenario (25% weight; $30 target price applying 1.7x to the firm's blue sky scenario year end 2017E tangible book value), downside scenario (10% weight; $15 target price applying 0.8x to Credit Suisse's downside scenario 2017E tangible book value), and base case discounted cash flow analysis (65% weight; $27 target price applying a 10.5% cost of capital and 3% terminal growth rate). Risks to achievement of this target price are largely tied to earnings, the macro outlook, and Bank of America’s ability to improve operating leverage and return increasing amounts of excess capital to its shareholders.
Credit Suisse continues to recommend purchase of BAC shares. Progress continues. This franchise can grow and all the more so in a rising rate environment. Better revenue growth coupled with visible operating leverage and manageable credit cost increases will be the keys to realization of franchise value.
The companies mentioned in this article are subjects of research reports issued recently by investment firms. Their opinions in no way represent those of VoiceObserver.com