(Adds analyst comments)
May 15 (Reuters) - Banc of America Securities raised its price target on Merrill Lynch & Co MER.N, citing better prospects for near-term earnings in a tough macroeconomic environment, and renewed confidence in the management.
“While the environment suggests the group is not out of woods, Merrill’s capital base is solid, de-leveraging of illiquid assets continues, and long-term outlook excluding fixed income remains strong,” wrote analyst Michael Hecht, who has a “buy” rating on Merrill.
Hecht also said the current quarter may be the first in a while where Merrill has fewer write-downs relative to peers because the firm has less “basis risk” — or the risk that the price of a future will vary from the price of the underlying cash instrument as the future’s expiration date approaches.
Other large U.S. investment banks that have benefited from hedges in the past are now seeing significant divergence of cash versus derivative spreads, the analyst said.
Merrill is not a retail pure-play, but has significant leverage to increasingly fee-based retail brokerage and less exposure to fixed income than peers, Hecht said.
Significant stock buybacks should enhance returns, adding to return on equity over the next couple of years, he added.
“We therefore expect Merrill may outperform near term in its global markets and investment banking (business) while also enjoying better relative stability that a large wealth management business can provide,” Hecht said.
He raised his target on the stock to $57 from $53.
Last week, Merrill Chief Executive John Thain said he expects U.S. investment banks that have suffered massive subprime mortgage-related losses to report smaller losses in the coming quarters, but added that banks with large exposure to consumers will see more pain.
Merrill shares closed at $48.87 Wednesday on the New York Stock Exchange. (Reporting by Tenzin Pema in Bangalore; Editing by Jarshad Kakkrakandy)