Merrill Lynch’s 4 Large Cap Banks to Buy With Big Upside Potential

By Lee Jackson Published Feb 6, 8:25AM EST

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During the fourth-quarter earnings reporting period, one group of stocks that was marched out to the woodshed for a spanking was the large cap banks. Trading misses, low returns on deposits, lousy equity capital markets and a host of other reasons were brought up. A new research report from Merrill Lynch points out that the bank sector performance relative to the S&P 500’s performance this year is clearly macro dependent. More to the point, it is dependent on the trajectory of rates. With everybody bullish on being long the Treasury market now, the contrarian view that rates do sneak higher may be a winner.

The good thing for the big banks when low rates are in place is the added enthusiasm for the stock market. While fourth-quarter trading and equity capital markets numbers were down, estimates were ratcheted down as well. We scanned the list of top bank stocks to buy at Merrill Lynch and four large cap leaders may be poised to rally this year.

BB&T Corp. (NYSE: BBT) is a top bank to buy for 2015 at Merrill Lynch. It is one of the largest financial services holding companies in the United States, with $184.7 billion in assets and market capitalization of $28.9 billion. It operates 1,824 financial centers in 12 states and Washington, D.C., and offers a full range of consumer and commercial banking, securities brokerage, asset management, mortgage and insurance products and services. The Merrill Lynch analysts are positive on the stock after solid results that beat estimates in January.

BB&T investors are paid a respectable 2.6% dividend. Merrill Lynch has a $44 price target, while the consensus figure is at $41.09. The stock closed Thursday at $37.09.

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Citigroup Inc. (NYSE: C) got hit hard after missing earnings estimates, and it is the perfect large cap stock to buy for a rebound. The Merrill Lynch analysts feel that the large-cap money center giant will surpass expectations in the first quarter as it “passes” the Federal Reserve’s Comprehensive Capital Analysis and Review and winds down capital dedicated to Citi Holdings and sells or spins off the bank’s One Main Financial Holdings subprime lending business. These catalysts, combined with the bank’s strong domestic and international business, make it a solid buy for investors, one of the reasons the stock resides on the Merrill Lynch US 1 list.

Citigroup shareholders are paid a minuscule 0.1% dividend. The Merrill Lynch price target is $63. The consensus target is at $60.13, and shares closed on Thursday at $48.54.

JPMorgan Chase & Co. (NYSE: JPM), like most of the top money center banks, is expected to benefit from commercial loan growth and an upturn in capital spending. Wall Street analysts agree that the stock seems attractively valued on 2015 estimated price-to-earnings of 9.85, which is the lowest among market sensitive banks, and a very solid price-to-book value. Some on Wall Street have cautioned that last year’s divestiture of the physical commodities business could provide an earnings headwind next year. The analysts point out that the improvement in loan growth and a steady increase in deposits will be a solid plus. Trading at a discount to the other large cap banks on 2015 earnings estimates also helps upside potential.

J.P. Morgan investors are paid a respectable 2.82% dividend. The Merrill Lynch price objective is $68, and the consensus target is right in line at $67.29. The stock closed Thursday at $56.77.

Wells Fargo & Co. (NYSE: WFC) is another solid financial name on the Merrill Lynch list that really may see a benefit if yields start moving higher sooner. The yield curve typically steepens in an improving economy, which many on Wall Street currently anticipate. Wells Fargo has slowly, but surely, become one of the biggest mortgage lending companies in the United States, in addition to its normal banking and brokerage businesses. An increase in commercial real estate lending could really boost the bank’s bottom line. It also remains a top Warren Buffett holding.

Wells Fargo shareholders are paid a 2.6% dividend. The Merrill Lynch price target of $60 compares to the consensus target of $56.05. Wells Fargo closed Thursday at $53.67.

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These four large-cap banks may be offering investors one of the best entry points since the financial disaster of 2008. With all four solid buys for growth portfolios, even a short shift higher in rates and a continued stock market run could boost earnings for the rest of 2015.

About the Author Lee Jackson →

Lee Jackson has covered Wall Street analysts' equity and debt research and equity strategy daily for 24/7 Wall St. since 2012. His broad and diverse career, which included a stint as the creative services director at the NBC affiliate in Austin, Texas, gives him unique insight into the financial industry and world.

Lee Jackson's journey in the financial industry spans over 30 years, with nearly two decades as an institutional equity salesperson at Bear Stearns, Lehman Brothers, and Morgan Stanley. His career was marked by his presence on the sell side during pivotal Wall Street events, from the dot.com rise and bubble to the Long Term Capital Management debacle, 9/11, and the Great Recession of 2008. This is a testament to his resilience and adaptability in the face of market volatility.

Lee Jackson’s practical financial industry experience, acquired from a career at some of the biggest banks and brokerage firms, is complemented by a lifetime of writing on various platforms. This unique combination allows him to shed light on the intricacies and workings of Wall Street in a way that only someone with deep insider experience and knowledge can. Moreover, his extensive network across Wall Street continues to provide direct access for him and 24/7 Wall St., a privilege few firms enjoy.

Since 2012, Jackson’s work for 24/7 Wall St. has been featured in Barron’s, Yahoo Finance, MarketWatch, Business Insider, TradingView, Real Money, The Street, Seeking Alpha, Benzinga, and other media outlets. He attended the prestigious Cranbrook Schools in Bloomfield Hills, Michigan, and has a degree in broadcasting from the Specs Howard School of Media Arts.