Why Bank of America is a Better Bet Than JPMorgan Chase

During the past six months of trading JPMorgan Chase (JPM) and Bank of America (BAC) have been running neck and neck: JPMorgan has dropped 2.3%, while Bank of America has fallen 1.9%.

But just because their return have been similar during the past six months doesn’t mean investors should treat them similarly. In fact, UBS analyst Brennan Hawken and team decided now is the time to favor Bank of America over JPMorgan.

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Hawken explains why he downgraded JPMorgan to Neutral from Buy…

We are downgrading JPMorgan as there is not sufficient upside to our price target and we are unconvinced that JPMorgan’s multiple will expand in the current environment. We continue to believe JPMorgan has an outstanding franchise and is a very well-run bank. However, we would prefer to own earnings recovery stories, as we believe they present more opportunities for alpha than the stable franchises. Specifically, given the secular pressures on the business plus the nearly insatiable appetite for fines by regulators, we would rather not be reliant on the environment improving.

…and upgraded Bank of America to Buy from Neutral:

We are upgrading BofA to Buy, as we believe that BofA is well positioned moving forward given its leverage to rising rates, more stable funding base, non-environmental earnings drivers, and capacity to expand its return of capital to shareholders. Specifically, we believe BofA’s more stable and sticky funding base enhances its leverage to rising rates, particularly to a move in the short end of the curve. We analyzed BofA’s deposit base, with its higher proportion of core deposits and estimate they have a lower deposit beta than other money centers. So we expect that BofA will actually be under less pressure to pass on rate increases to deposit holders resulting in higher long-term earnings power from higher rates.

Hawken lifted his Bank of America price target to $20 from $16.80, while leaving his $64 price target on JPMorgan unchanged.

Bank of America has gained 0.3% to $16.86 at 3:18 p.m. today, while JPMorgan Chase has dropped 0.7% to $58.98.