Don't Buy JPMorgan's Stock: Societe General

NEW YORK (TheStreet) -- This is a good time to buy shares of Bank of America (BAC) and Citigroup (C), but investors should steer clear of JPMorgan Chase (JPM) and Wells Fargo (WFC) for the time being, according to Societe General.

Societe General equity analyst Murali Gopal and his research team on Friday initiated their coverage of the "big four" U.S. banks.

Gopal rates Bank of America a "buy," with a $17 price target. "BAC is uniquely placed for sustained outperformance -- in the near term significant cost savings, additional reserve releases and a strong capital markets business will be supportive of earnings growth and improvement in [returns on tangible equity]," the analyst wrote in a note to clients. Gopal added that "Over the medium term, as short-term rates rise, the bank's strong retail branch network and core deposit base should boost top-line growth. Society General estimates Bank of America's operating earnings will grow from 1.01 a share this year to $1.37 in 2014 and $1.72 in 2015.

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Society General also rates Citigroup a "buy," with a $59 price target. The improvement in housing prices is a good sign for Citi Holdings, which is the company's subsidiary into which noncore assets have been placed to runoff. The rise in home prices "bodes well" for the release of loan loss reserves, which boosts operating earnings, and $6.4 billion of the reserves within Citi Holdings are tied to North American housing, according to Gopal. "Stronger US taxable earnings will be a larger driver of Deferred Tax Assets (DTA)," recapture, according to the analyst. Citigroup's DTA valuation allowance was roughly $45 billion at the end of the second quarter, and the company's earnings during the first half of 2013 were boosted by $1.3 billion in DTA recapture. Gopal estimates Citi's adjusted EPS will increase from $4.93 in 2013 to $5.64 in 2014 and $6.31 in 2015. For JPMorgan Chase, Society General's initial rating is a "hold." The company's operating performance should be "steady," however, "Rising investigations, litigation and regulatory scrutiny will take time to resolve, and should keep related costs elevated, but more importantly, curb investor sentiment," according to Gopal. Society General estimates JPM's EPS for 2013 will total $5.88, declining slightly to $5.85 in 2014 and increasing to $6.25 in 2015.

JPMorgan was hit early Thursday with $920 million in fines from four regulators over the "London Whale," hedge trading debacle in 2012. Later on Thursday, the Consumer Financial Protection Bureau said JPMorgan had already refunded $309 million to 2.1 customers, with the Office of the Comptroller of the Currency also assessing a $60 million fine, spring from the two regulators' combined investigation of its "illegal credit card practices."

Gopal also rates Wells Fargo a "hold," citing "near-term headwinds," with "little room for improvement." Wells Fargo for years has been the strongest earnings performer among the "big four," as measured by returns on average assets and equity. But with the leading market share among U.S. mortgage lenders, the bank is facing a significant revenue decline as higher long-term interest rates lead to significantly lower mortgage refinance volume.

"Spread revenues along with mortgage banking comprise roughly two-thirds of the top line," for Wells Fargo, according to Gopal. And with the Federal Reserve likely to keep the short-term federal funds rate in a range of zero to 0.25% for an extended period, the bank could be waiting for years for the parallel rise in rates it needs for a significant boost to net interest margins and net interest income.

JPMorgan continues to be the cheapest on a forward price-to-earnings basis among the big four, despite the company's solid earnings performance over the past several years. JPM reported its third record annual profit of The shares closed at $52.75 Thursday and traded for 8.7 times the consensus 2014 EPS estimate among analysts polled by Thomson Reuters. The next cheapest among the group is Citigroup, with shares closing at $51.95 Thursday and trading for 9.3 times the consensus 2014 EPS estimate of $5.56. Bank of America's shares closed at $14.61 Thursday and traded for 10.7 times the consensus 2014 EPS estimate of $1.36. Wells Fargo has a similar valuation, with the shares closing at $42.96 Thursday and trading for 10.7 times the consensus 2014 EPS estimate of $4.01. RELATED STORIES: Jamie Dimon Unlikely to Face SEC Charges 'Historic' Admission to SEC Won't Help JPMorgan Plaintiffs JPMorgan Skewered for 'Illegal Credit Card Practices' JPMorgan Slapped with $920 Million in 'London Whale' Fines Wells Fargo Continues Mortgage Staff Layoffs as Refinancing Volume Drops -- Written by Philip van Doorn in Jupiter, Fla. >Contact by Email. Follow @PhilipvanDoorn

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.