Weak Trading and Lower Investment Banking Revenues May Hurt These Banks

Here are the five top banks on Wall Street when it comes to dominating revenue categories. The UBS team suspects that the soft conditions could lead to further cost cutting as the year progresses, but they doubt any cuts will lead to substantial changes to business models for the top investment banks.

Bank of America Corp. (NYSE: BAC) has not gotten much love from Wall Street lately. The company is in a much better situation than last year. Earnings are much more consistent, capital has improved and a bigger dividend and share repurchase effort seems very likely next year. Worries over more fines and sanctions still hover over the bank, and its reporting issues are a cloud as well. The dividend for investors is a paltry 0.3%. UBS rates the stock Neutral and has lowered earnings estimates for the second quarter and 2014. The price target for the stock is $16.50. The Thomson/First Call consensus target is $17.23. The stock closed Friday at $15.59 a share.

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Citigroup Inc. (NYSE: C) has been a poor performer this year for investors, down more than 10% year-to-date. The bank trades at an incredible 9.5 times forward earnings, but it is still losing the trading revenue battle. The bank’s total equity capital markets revenue has also dropped year-over-year. Investors are paid a small 0.1% dividend. UBS has a Buy rating on the stock and a $61 target. The consensus target is $58.28. Citigroup closed Friday at $48.93

Goldman Sachs Group Inc. (NYSE: GS) remains the premier bank on Wall Street, but the UBS rating for the stock is Neutral. The company has been very vocal lately when commenting on guilty pleas from banks that it does business with. In fact, CEO Lloyd Blankfein said guilty pleas by foreign banks could affect its relationships with them, saying the impact “depends on the consequences of the guilty pleas.” While still a prime purveyor of initial public offerings, the company’s year-over-year revenue for the high-profile transactions is expected to drop. Investors are paid a 1.4% dividend. The UBS price target for this ultimate white-glove firm is $174. The consensus target is $175.21. The stock closed Friday at $166.19.

JPMorgan Chase & Co. (NYSE: JPM) is one of the top three bulge bracket banks to buy at UBS. The company may be nearing the end of a very long stretch of losses and penalty pay-outs. Between mortgage settlements and trading gaffes, the company has taken a PR beating and has still held up well. The mega-cap bank is expected to benefit from commercial loan growth and an upturn in capital spending. This may help offset lower trading and capital markets revenue. Investors are paid a solid 2.8% dividend. The UBS price target is $66, and the consensus is at $64.20. Shares ended Friday at $53.83.

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Morgan Stanley (NYSE: MS) rounds out the top five bulge bracket banks and is also rated Buy at UBS. The company was the only firm to see a year-over-year increase in investment banking revenue, up 6% quarter versus quarter, and the UBS team also expects total revenues to be 11% versus last year. Investors are paid a 1.3% dividend. The UBS price target for the stock is $32, and the consensus stands higher at $34.42. Morgan Stanley closed Friday at $31.95.

One question always comes to mind when overall revenue shrinks: could there be consolidation? With a very poor view of huge banks in general by regulators, politicians and citizens, and the whole “too big to fail” worries that have hovered since the recession, consolidation seems unlikely. However, that does not mean that one of these banks would acquire a smaller super regional or similar asset to generate revenue growth.