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Citigroup Inc. (C)
We use a three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our $60 PO, assigning a 0.9x multiple to 2017E TBV and 11x multiple on '17E blended NA and EM earnings. We have weighted the P/E and P/TBV factors equally at 40%, and our DCF analysis by 20%.
Near term, we view C's current market multiple as overly discounted, but expect money center banks will likely continue to trade at a discount to the regionals. Our 1x TBV multiple represents a 0.3x discount to our median multiple for our universe. Our discount to TBV is a reflection of the earnings drag from Holdings and the fact that money centers will most likely continue to trade at a discount to regional peers. Our 11x 16E multiple is based on a sum of the parts analysis, where we apply a 10.5x multiple, on all operations ex. Lat Am and Asia GCB. We then apply a 11x multiple on Lat Am and Asia GCB to represent the earnings growth for consumer banking in emerging markets. Lastly, we deduct the earnings drag from Holdings. Our DCF analysis assumes a 5% growth rate and two stage cost of equity of 13%.
Risks to our PO are macro risks such as a slower than expected rate of fed hikes, and economic downturn and further scrutiny of the financials industry. Specific to C, risks are enhanced regulatory and capital standards as a Global SIFI, slower wind-down on Citi Holdings than expected, and slower-than-expected growth in the emerging markets and potential fines.
Citizens Financial Group (CFG)
We use a three-factor valuation framework (P/TBV, P/E, DCF) to arrive at our $33 price objective and assign a 1.2x multiple to our 2017E TBV in-line with other asset sensitive peers. We place a 15x multiple on our 2017E EPS, also in-line with its asset sensitive peer group. Our DCF assumes a two-stage cost of capital of 10% and a terminal growth rate of 5%.
Downside risks to our price objective are: 1) a significantly delayed Fed rate hike leading to pressured revenue growth, 2) higher losses associated with CFG's consumer oriented loan portfolio, and 3) a quicker than expected credit normalization.
Comerica Incorporated (CMA)
We use a three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our $55 PO, and assign a 1.2x multiple to 2017E TBV (in line with the median energy-exposed peers) and 16x multiple on 2017E EPS due to below peer EPS growth and ROTE. We have weighted the P/E and P/TBV factors equally at 33%, and our DCF analysis by 33%. Our DCF assumes a two-stage cost of capital of 12.3% and 10.5% and a terminal growth rate of 5% and Tier 1 common of 8% at termination.
Downside risks to our PO are a more severe than expected impact from lower energy prices, or a slower than expected rate of fed hikes. Upside risks are a better than expected rebound in energy prices and sooner recognition of cost saves.
Commerce Bancshares Inc. (CBSH)
We use an equal-weighted three-factor valuation framework (P/E, P/TBV, DCF) to arrive at our $60 PO and assign a 2.2x multiple to 2Q17E TBV, representing a premium to peers, given higher-quality earnings and capital position. Our assigned 18x multiple on 2017E EPS is at a premium to peers due to higher earnings quality. Our DCF assumes a terminal cost of equity of 9%, and a terminal growth rate of 3%.
Downside risks to our price objective are regulatory headwinds, or longer-than-anticipated low-rate environment. Upside risks are a stronger-than-expected economic rebound, better-than-expected capital distribution and a potential takeout above our price objective.
66 2016 Future of Financials Conference | 17 November 2016
Bank of America Merrill Lynch
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