Baird cuts Bank of America, JPMorgan on ‘not attractive’ risk/reward

Baird downgraded Bank of America (NYSE:BAC) and JPMorgan Chase (NYSE:JPM), citing that risk/reward trade-off in mega-cap banks is not attractive and regionals look better on a valuation basis.

“We understand the optimism around mega-cap banks here – benefits from deregulation, solid capital positions, capital markets are opening up, and JPM is the gold standard in the group,” said analyst David George in a research note.

George is of the view that BAC is at full value and JPM has modest downside from current levels, trading at record valuations.

“We understand that few care about valuation currently, but we still believe they are one of the primary drivers of forward returns,” said the analyst.

Bank of America was lowered to Neutral from Outperform, with a price target of $52. Shares were -0.18% during Friday morning trade to $47.38.

“BAC’s cap/assets is now close to ~11%, and the market is discounting a 1% ROA, above 25E/26E consensus estimates. We remain huge fans of the BAC franchise and the bank should continue to experience the tailwind of an improving NIM along with a more favorable capital markets backdrop, but feel like the stock is largely reflecting it here,” said the research note.

The rating differs from the average sell-side analyst rating and Seeking Alpha’s Quant rating of Strong Buy. However, it aligns with the average SA authors rating of Hold.

Meanwhile, JPMorgan was cut to Underperform from Neutral, with a price target of $235. Shares were -0.68% in the morning to $286.80.

“We realize we are fighting the tape here, and understand that JPM is a best-in-class franchise, with dominant share in all of their businesses and truly a fortress balance sheet,” said the analyst.

Baird analysts think that “expectations are super high here” and returns “will likely not be what they’ve been the last several years at these valuation levels”.

On the other side, JPMorgan gets a Buy rating from the Wall Street community and a Hold rating from Seeking Alpha analysts and Quant.

“Regionals look better to us on a risk/reward basis, as expectations are relatively low compared with the mega caps,” said the analyst note.

“On a cap/assets basis, the group is also trending modestly below value, but there’s significant dispersion between the megas (which appear modestly overpriced) and the regionals (modestly underpriced),” said the note.