Banks Go From 'Euphoria To Panic In A Week,' But BofA And SunTrust Might Be Rebound Plays

• Bank stocks came under pressure last week, with investors agonizing over the uncertainty surrounding interest rates.
• Baird’s David A. George upgraded the rating on Bank of America Corp BAC from Neutral to Outperform, with a price target of $18, and on SunTrust Banks, Inc. STI from Underperform to Neutral, with a price target of $41.
• George said that investors should use this pullback and shift in sentiment to “close short positions and selectively buy banks.”

While stating that a larger rate hike was unlikely, analyst David George recommended buying banks when consensus was “closer to the view that rates will never rise” rather than when the expectations reflect a 2 percent Fed funds rate.

Bank of America’s shares are close to ~1x 2015E tangible book value despite “record capital/liquidity levels and a relatively benign credit outlook.” With this, the stock’s risk-rewards appear “more interesting,” George stated.

The analyst expects Bank of America’s core NII to decline below the ~$10B quarterly run rate, in case rates remain low. Moreover, the company would need more aggressive cost cutting next year to boost returns. George added that Bank of America is now a “compelling tactical long idea.”

SunTrust’s shares have declined by 14 percent over the past month and its risk/reward has “rebalanced,” the Baird report said. Valuation now is in-line with the peer median, while the company delivered improving operating leverage and loan growth.

Consensus expectations for SunTrust call for 2 bps of NIM expansion between Q315 to Q416, as compared to the peer median of +8 bps. George believes that this would “help limit downside to 2016E EPS.”