Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 16 December 2013 at 10:13 GMT

Quant Corner: BofA and Visa upgraded, Deutsche Bank downgraded

Head of Equity Strategy / Saxo Bank

By Peter Garnry

This is the second publication of the new Quant Corner and this means that the publications will now show any changes in the model's views. We have selected the three most important changes.

Bank of America upgraded to positive
The second-largest US bank measured on total assets has had a good year with its stock advancing 30.7 percent (see chart) as rising credit demand and an accelerating US economy have lifted financials. Bank of America is expected to deliver 7.0 percent in return on equity over the next 12 months. This is still not covering the cost of equity but the current price-to-book ratio of 0.7 reflects a too pessimistic view of the future. With relative good momentum in stock price and the economy, Bank of America is an interesting play going into 2014. The key driver for Bank of America is still cost control as revenue remains sluggish — but that could easily change next year.

Bank of America share price

Source: Saxo Bank

Visa upgraded to neutral
The world's largest credit card issuer, with a US market share of almost 40 percent, is fundamentally overvalued according to our model. However, as regular readers will know the model utilises a technical filter to compensate for price action behaviour which is at odds with implied fundamental value. So our model indicates the stock is overvalued but the strong price action is indicating that the model is not capturing all relevant factors driving its fundamentals. As a result, the stock is upgraded from negative to neutral. The latest earnings releases have shown that Visa continues to improve incremental margins and only FX is currently holding results back in USD. With the global economy expected to expand next year and US consumers beginning to take on credit again Visa could be a strong candidate in 2014.

Deutsche Bank downgraded to negative
Germany's largest bank was previously our model's favourite among European banks but downward revisions to return on equity, now expected to be 7.3 percent over the next 12 months, have held the stock price back. The stock is currently fair priced with a price-to-book ratio of 0.6 but the weakening momentum is making our model change its view to negative. The restructuring is a move in the right direction but the bank still needs to improve its capital base and earnings a lot more before investors will push the price-to-book to par again. We maintain that Deutsche Bank has huge potential but it is going to be a tough battle for management.



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