We are upgrading the shares of Bank of America to Outperform from Neutral. We are recommending Bank of America, as the current risk/reward on the shares is attractive at current levels. BAC is the cheapest of our large cap banks on “normal” earnings trading at about 6.1 times (vs. large cap peers at 7.6x) and furthermore will build book value rapidly during 2010. We are increasing our price target to $21 (from $17), which equates to 1.5 times forward tangible book value and 7.9 times normalized earnings.
TARP repayment relieves a significant overhang; capital raise an incremental positive. The repayment of the entire $45 billion of TARP preferred relieves a significant overhang on the shares. Furthermore, the near-term financial implications of the capital raise and repayment are
favorable – leading to both near-term EPS and tangible book value accretion. With a fairly significant capital raise behind the company and bolstered capital levels (pro forma Tier 1 common ratio of 8.5% vs. large cap median of closer to 7.5%), we expect shares to outperform over the next 12 months. [credit suisse]
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